Draft Ueapme Response to the First Commission Consultation of The

UEAPME RESPONSE TO THE

FIRST COMMISSION CONSULTATION OF THE SOCIAL PARTNERS ON THE PORTABILITY OF SUPPLEMENTARY PENSION RIGHTS

SUMMARY POSITION

In light of the current challenges facing the European Union, including immigration, demographic change, skills shortages, and the requirements of a strong internal market, UEAPME favours the promotion of worker mobility and the removal of obstacles including transfer of supplementary pension rights. However, the focus of a Community initiative should be on cross-border transfers, and should not intrude into the different national systems of supplementary pensions as the Community’s competence in the field of social security is limited, and given the diversity of national systems, a “one-size-fits-all” solution would be impossible to achieve anyway.

The Community could and should however, act in the field of taxation, where a lack of harmonisation has a demonstrable and widely-recognised impact on the transferability of pension rights. Beyond fiscal issues, it might be that within the national systems of some Member States it is less easy to transfer supplementary pension rights than in others. Beyond the question of taxation issues, UEAPME believes it is necessary for the Commission to undertake an in-depth study into the obstacles which exist across the EU, in order to put more substantiated information at the disposal of the social partners and the Member State governments, and to enable them to decide upon proportionate and effective action.

INTRODUCTION

UEAPME is pleased to respond to the first-stage consultation of the Social Partners on the portability of supplementary pension rights, launched by European Commission on 12th June 2002, in accordance with the procedures laid down by Article 138.2 of the EC Treaty.

The ageing population, the need to encourage sustainable pension systems, to promote worker mobility, and to attract and retain skilled workers are all reasons why UEAPME is pleased to see the attention given to the issue at Community level. Furthermore, UEAPME welcomes the variety of reforms and initiatives which have already been undertaken both on Community and on national levels in recent years to promote mobility and to secure supplementary pension provision.

In line with its action plan on mobility, the Commission stresses the need to make progress in the portability of the supplementary pension rights of migrant workers, and invites social partners, Member States and European institutions to intensify their efforts to ensure improved portability.

Supplementary pension rights have already been the subject of a number of Community initiatives in the last decade, enumerated by the Commission in the consultation document:

-the Communication of 22 July 1991 on supplementary social security schemes

-the Veil report presented on 18th March 1997 which highlighted loss of rights as a clear disincentive to mobility and an obstacle to free movement

-Commission green paper on supplementary pensions in the Single Market of 10th June 1997

-Directive 98/49/CE on the safeguarding of supplementary pension rights

-The work of the Pensions Forum in 2000 and 2001, and the three reports produced by the working groups

Nevertheless, the working group of the Pensions Forum looking at the portability of pension rights reports that the transfer of acquired rights can be handled in two ways – either in terms of the preservation of acquired rights, or in terms of the transfer of a capital value, which may often prove to be the more practical solution. This suggests that even if we focus on the question of rights, there is a clear link between the issue of portability of rights, and the question of the transferability of the capital value to which the rights pertain. This has been considered in UEAPME’s response to the Commission’s consultation, and must be taken into account when deciding how this initiative might be developed.

GENERAL REMARKS

UEAPME regards the obstacles to the portability of pension rights as falling into two categories:

a)FISCAL

UEAPME considers that the different fiscal arrangements regulating supplementary pensions across the EU represent the principal barrier to the transferability of pension rights, and therefore to freedom of movement of workers. This is a major issue of cross-border transferability in particular, and can only be dealt with effectively by a binding instrument at Community level. This is backed up by the report of the working group of experts looking at transferability of pension rights within the Pensions Forum, which acknowledged that “tax issues are the most important obstacle to cross-border transfers”.

b)OTHER OBSTACLES TO TRANSFERABILITY

Although it is clear that taxation issues constitute the chief obstacle to the transfer of supplementary pension rights, it is likely that there are other obstacles existing to different extents in the individual Member States, which affect the transfer of supplementary pension rights between sectors, and companies within Member States. However, these can only be addressed by the Member States themselves on the basis of clear and comprehensive information and evidence as to how they affect mobility.

RESPONSES TO THE COMMISSION’s QUESTIONS

Question 1 – Should there be an initiative in this area? Do you share the Commission’s view that the absence of a specific body of provisions concerning the acquisition, preservation and transferability of pension rights at EU level has adverse impacts on workers and/or employers in the Internal Market?

UEAPME strongly believes in promoting the mobility of workers and to this end, supplementary pension schemes should not disadvantage mobile, flexible workers. Transfer of pension rights should therefore be facilitated, and the administrative difficulties reduced as far as possible both within and between Member States. The EU, however, is only competent to take action in the case of cross-border obstacles to mobility. Furthermore, any regulation affecting the second pillar which involves a degree of harmonisation of the national systems is 1. unrealistic given the vast variety of supplementary pension systems across the different Member States of the EU

2. would be contrary to the chosen method of open co-ordination which has been established between Member States in the field of social protection and pensions, and is progressing through the work of the Social Protection Committee.

UEAPME therefore suggests that initiatives in this area should be two-dimensional;

a) TAXATION ISSUES

On the one hand, as the EU Pensions Forum has rightly established, lack of transferability of pension rights within the EU arises principally because of unequal taxation regulations and discriminatory taxation practices. This suggests that an initiative is required to deal with the fiscal aspects of transferability of pension rights, addressing in particular the following three main problems:

1. double taxation for workers moving between member states because of different systems of tax exemption and payment which results in some workers being taxed twice both on contributions and on benefits
2. taxes on the transfer of accrued capital across borders but not within Member States
3. discriminatory rules such as taxation on contributions paid to an occupational pension scheme in another Member State which creates obstacles for cross-border affiliation of occupational pension schemes.

The application of the so-called EET principle (EET = exempt contributions, exempt investment returns, tax pension benefits) to taxation law throughout the EU could go a long way to addressing these tax obstacles. UEAPME urges the Commission to progress quickly on this issue, and in particular to bring to fruition the initiative launched in the Communication of 19 April 2001 on the elimination of tax obstacles to the cross-border provision of occupational pensions.

b) OTHER ISSUES

As to whether a Community initiative addressing other issues affecting portability is timely and necessary, UEAPME believes that there is insufficient information as to the nature and extent of obstacles other than fiscal barriers. The expert working groups of the Pension Forum have produced useful reports looking at the issues. However, these reports were not officially adopted by the plenary, they did not make broad and in-depth surveys of the situations in each country, and the experts in the working group were not necessarily representative of all interested parties. UEAPME therefore recommends that a detailed study be undertaken, perhaps through the establishment of a high-level expert group, (as in the case of industrial relations, or skills and mobility), which will examine the issues and will identify the particular obstacles, in order that both Social Partners and Member States have a basis on which to determine the best possible course of action for facilitating the transferability of pension rights both across borders and within the Member States themselves.

Question 2 – If so, what form do you think action at European level should take (collective agreement, directive, recommendation, code of practice, guidelines etc)?

In accordance with the two categories of obstacles identified above, UEAPME proposes two courses of action:

a) TAXATION ISSUES

First and foremost action at Community level should deal with the issue of harmonising fiscal regulations across the EU in order to remove the principal obstacle of discriminatory taxation. This can only be done effectively by means of a binding legal instrument. However, the diversity of supplementary pension arrangements across the different Member States make it unrealistic to resolve obstacles beyond those of a fiscal nature by legislative means.

b) OTHER OBSTACLES

The outstanding obstacles to transferability beyond the fiscal barriers could however, be the subject of a technical seminar, and exchanges between experts in order to identify more clearly and in more detail, what these obstacles are. However, it is difficult to make further suggestions as to the type of instrument, without more extensive and more detailed information on the extent and nature of the problem.

Question 3 – What should the main features of such measure be?

Since the safeguarding of supplementary pension rights have already been dealt with by Directive 98/49, and the regulations concerning the acquisition of pension rights remain the prerogative of individual Member States, in line with the two-pronged approach to the question of the transferability of pension rights on Community-level, UEAPME recommends the following measures:

a) TAXATION ISSUES

The main focus of a Community initiative to address the fiscal obstacles to transferability of existing pension rights, should be the harmonisation of taxation arrangements.

b) OTHER ISSUES

-An important issue when it comes to transferability of pension rights is the question of vesting periods.

In a number of EU Member States, vesting periods have traditionally been regarded, amongst small employers in particular, as a means of binding an employee to an enterprise and thereby reducing the risk to the employer of losing skills and know-how. Longer vesting periods also have the advantage of avoiding excessive fragmentation of supplementary pension rights and excessively burdensome administration. Unnecessarily long vesting periods or excessively high minimum ages can be obstacle to development of schemes and to mobility of workers. Given the increasing difficulty of finding and keeping skilled workers, and the competitive pressures SMEs are under from big companies, it is vital for small enterprises in some countries, to use pension funds as a means of binding their workers for a certain time, in order to provide a sound basis for skills development and growth in productivity.

It is therefore necessary to find the right balance on the question of vesting periods, whilst recognising that it will not be possible to achieve harmonisation because of the variation in the nature of different pension funds. Furthermore, if vesting periods are to be reduced, transition periods will be essential in order to help employers absorb additional costs which will be entailed. These transition periods should be at least identical to the current length of the vesting period.

-Accumulation of Rights

A harmonised system of taxation across the EU would allow for transfer of capital, which UEAPME considers to be the best and most cost-effective solution for facilitating cross-border mobility. In a situation where such a harmonisation of fiscal systems is not possible to achieve, the accumulation of rights might be considered a second-best solution. However, this would require more bilateral co-operation between Member States, would depend on the effective implementation and efficient functioning of the new directive on European Institutions for Occupational Retirement Provision, and would incur higher administrative costs for supplementary pension funds, which would have an undesirable impact on both employers and employees.

-Internal mobility

The question of internal mobility within Member States should be the subject of an in-depth study which highlights the problems and illustrates them with concrete evidence. Secondly, the problems should be addressed within the open method of co-ordination practised by the Member States and in particular by the Social Protection Committee, which was clearly described in the Communication from the Commission on 3rd July 2001 “Supporting national strategies for safe and sustainable pensions through an integrated approach” and which respects the principle of subsidiarity.

-Technical issues

Common actuarial principles and the technical aspects of transferability of pension rights such as calculations involving interest rates and other economic and demographic factors, should be established using precedents such as the work undertaken for the proposed Directive on Institutions for occupational retirement provision, and the work of the GCAACE – Groupe consultatif des associations d’actuaires des pays de la CE.

-Better information

As a general rule, there is a need for better communication and exchange of information on supplementary pension schemes both for employers and employees so that they can make the best mutual arrangements. Community measures should therefore seek to promote simplification and transparency and should avoid imposing additional burdens on employers both in terms of administration and financial cost.

Question 4 – Should action be taken at cross-sectoral and/or sectoral level?

In the first event, action at Community level can only be taken on a cross-sectoral basis, and should take account of the diversity of conditions in the Member States. However, depending upon the outcomes of the in-depth survey of the situation, recommended by UEAPME, it may be possible to foresee sectoral initiatives undertaken in the long-term.

Question 5

Should such a measure apply equally to all supplementary pension schemes or should distinctions be made between supplementary pension schemes financed only by an individual employer and those financed jointly by employers and employees, between voluntary and mandatory schemes, between pension entitlements based on individual employment contracts and those based on collective agreements?

UEAPME believes that the transnational measures should apply to the following types of schemes:

a)compulsory supplementary pension schemes

b)those schemes where both the employer and employee make contributions

In this respect there is no need to make a distinction between pension entitlements based on individual contracts and those based on collective agreements at branch and enterprise level.

Non-contributory voluntary supplementary pension schemes

These are voluntary supplementary pension schemes where only the employer makes contributions, and they are therefore “non-contributory” for the employee. They have long been regarded by employers as a voluntary means to reward staff loyalty and even if supplementary pensions are increasingly regarded rather as deferred income, UEAPME believes it is necessary to distinguish those pension schemes where contributions are made solely by the employer. Since the purpose of these systems is to foster employee loyalty by binding him/her to the enterprise, the total portability of rights could be contrary to this aim.

CONCLUSION

• It is important that the details of acquisition and transfer of rights be decided at national, sectoral and company level in accordance with the diversity of different systems.
• However, where transfer is possible within a member state, it should be equally possible across borders in order to promote worker mobility without the hindrance of discriminatory tax regulations. Therefore Community-level action by means of a binding legal instrument is required to deal with the fiscal hurdles involved in the transferability of pension rights.
• Furthermore, through recommendations and political discussions at Community level, it may be possible to achieve a greater degree of convergence between different occupational pension systems, which would facilitate the transferability of rights and thereby improve worker mobility.
• However, any measures must be founded on reliable, well-researched information in order that the social partners and the Member States can decide the best course of action.

Brussels, 28.08.02

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