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Are
pan-European schemes on hold? The savings being talked about were enormous. Multinationals were told they could cut costs to the tune of hundreds of thousands of pounds. Pan-European pension plans seemed to be the way forward, pilot schemes were discussed, and a draft directive, proposing a harmonised prudent investment principle was put forward by the European Commission last October. A year later, nothing is certain. The Commission issued a (non-binding) cross-border tax Communication in April. Few expect the directive, requiring unanimous agreement, to be passed in October. Pension industry professionals remain wary, whispering about rumoured pilot-schemes. Some are cynical, and all concur that a pan-European pension plan is a long way in the future. Why is such a good idea taking so long? At present, there are a number of discrepancies among EU member states regarding pension taxation, with some giving tax exemptions on contributions, and others on payment of benefits. While some of the 5 million EU citizens working away from their country of origin would be taxed both on contributions and benefits, others in a different country would escape deductions completely. Multinational firms must decide whether to administrate separate plans for employees who are seconded abroad, or whether to keep one in the country of origin, subjecting plans to varying rates of taxation. The European Commission recognises that: “national restrictions that impede the provision of pensions and life assurance without objective justification are incompatible with Community law,” and says it is prepared to take member states to the European Court of Justice (ECJ) if, by creating tax obstacles, they are preventing free movement of employees within the Union. The Communication was devised to complement the draft Directive, which makes no mention of tax or social security, but which concentrates on reconciling some of the difference in investment approaches between different member states. Margaret Craig, pensions development manager at Scottish Equitable, is cautious but optimistic about the viability of a pan-European plan, and believes that some good can come from the Directive even if it fails to address what she sees as the “major hurdles that are fairly fundamental in domestic law”. Craig says: “The investment issues the Directive is looking at [such as freedom to invest in shares and member protection] are important and I don’t think we should underestimate them.” She continues: “The UK is way out ahead when it comes to funded pension provision, so you could argue that our industry has expertise and experience that would be useful if more of a pensions market were to develop in the rest of the EU.” Ifs and buts are all very well, but does Craig think anything concrete is likely in the near future? She mentions the possibility of European law firms putting together a test case for the ECJ, but concludes: “I think what will dictate the pace of this is how much it matters to people. Are multinational companies really going to pursue this, is this really something they’re interested in?” Rhoslyn Roberts, benefits director of the NAPF, thinks so: “There are undoubtedly a number of multinationals who are NAPF members who would welcome some facility for them to run one pension scheme across Europe.” But, she believes the reality of changing long-established systems may be harder than it appears. “Most of them [multinationals] will have separate arrangements in each country, and they’ve gone through the torment, hassle and expense of setting those arrangements up, and often it’s quite difficult to unstitch them and put something else in its place, even if the something else is simpler.” Roberts argues that the biggest obstacle is culture-specific, as the degree of state pension provision varies so greatly within the EU. “I think whatever facilities there are for harmonisation, companies will always have to take into account local ‘social security’ conditions,” she says, adding: “The most useful thing we get from multinationals is information about what they think they would save.” According to EFRP (the European Federation of Retirement Provision) figures, the average multinational company would save 1.3mn euros (roughly £85,000): 40,000 euros on administration, 1.2mn euros on investment, 20,000 euros on compliance and 40,000 euros on governance. Over all multinationals, the sums stretch into the tens of millions of pounds. So why are the multinationals acting like they don’t care? “I think it’s becoming more high profile,” says Tony Bacon, a consultant with Towers Perrin. “I understand the government in particular is quite enthusiastic about pushing forward the prudential supervision Directive. It would be quite ironic if, on the one hand, post-Myners, the government were to abolish the MFR, then a couple of years later, there’s an equally, or perhaps even more stringent funding standard in place from Europe,” he says. Yet, he believes a government working group has put forth the argument that the directive be consistent with the post-Myners structure. Bacon claims the likelihood of an imminent result from the ECJ is very slim, and advises companies not to twiddle their thumbs waiting for a ruling: “It’s our view that there’s more useful things a multinational company can do in the meantime, rather than jump in feet-first and set themselves up as a guinea pig to be picked off by French or Spanish revenue departments,” he says. He lists a consistent policy in all EU states on funding, investment, performance monitoring and benefit design as practical examples of what else multinationals can focus on. “There are methodologies whereby you can take into account the inconsistencies in the national tax and social security structures, but the strategy is the same for your worker in Valencia or your worker in Stockholm. We think there are probably big wins to be made out there in terms of having a pan-European approach to what you deliver. It’s good risk management.” Robin Arnold, partner in Bacon & Woodrow’s International Employee Benefits team has other suggestions for bored multinationals: “One thing multinational employers can do at the moment is to deal with their expatriate people more efficiently. The Commission said they were going to be very tough on people who wouldn’t allow expatriates to stay in their home-country plans and give them the relevant tax deductions...I just wonder if every multinational around is actually making sure that all their expatriates are being treated in the most cost-effective and useful manner.” Have they looked closely enough at what’s possible at the moment without further legislation? The European Commission objects to the status quo as it prevents what it considers to be free mobility across the states. It is spending a lot of time and resources ensuring that the Treaty is adhered to. But the question remains, would a pan-European scheme really motivate workers to transfer to another country? Is a pension that much of an incentive to the average employee? “I’ve never believed that people would not take a job in another country just on the basis that their pension would be affected,” says David Formosa, principal at W M. Mercer. He cites the example of the effect of the single market on insurance, with cultural differences and social security issues proving too strong a barrier. Although they are free to do so, “you don’t see British people buying Austrian car insurance,” he says. Robin Arnold sums up much of the industry feeling: “The ones who’ve got it right, understand the culture of all the countries involved and have the right administrative facilities, if it came to pass, should do awfully well.” But, he is sceptical as to how many companies are prepared to involve key employees in a project which may not materialise for years to come. Rumour
and secrecy surround the test cases which may or may not be brought
to the ECJ. Projected savings figures vary from thousands to millions
according to industry sources, but may well not be “as vast as the
man in the street might think,” according to Arnold. A pan-European
plan is, for the moment, still a far-off utopia. A decision on the
draft directive later this month is a possibility, but Tony Bacon
“wouldn’t hold [his] breath.” By all accounts, it would seem prudent
for multinationals to concentrate on what they can do to improve
other aspects of their European business, rather than wait on a
flimsy promise. In the long run, they might end up with a larger
piece of the pie.
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