The European Commission (EC) is finalising a major overhaul of the pension fund industry in the Euro...
The European Commission (EC) is finalising a major overhaul of the pension fund industry in the European Union. The reforms aim to reduce the burden on state-pay-as-you-go schemes by encouraging a shift of savings to equities in a truly single market.
The pension funds proposals are part of a wider overhaul of the financial services sector in the EU, which should extend to this industry the single market already in place for banks, allowing pension fund managers to market their funds across the EU, removing national restrictions.
James Barty, chief European equities economist for Deutsche Bank, says: "The EC is trying to set a level playing field for the whole of Europe."
The EC is promoting participation of investors in an integrated market, through the removal of barriers to investments in pension funds. This will also grant the widest possible access to investment capital across the EU, says José Luis Alzola, analyst for Schroder Salomon Smith Barney, who heralds the proposed new rules as a major breakthrough.
Indeed, the EC has finalised a draft directive regarding the supervision of pension funds, which if approved by the European Council in December, will become effective in 2002. Meanwhile, moves are underway to co-ordinate the tax treatment of supplementary company and individual pensions, which is expected to come into force by 2003.
"New rules for asset allocation for pension funds will encourage a sizeable shift of savings away from domestic into international bond markets and to equities," says Alzola. Although member governments will still control the choice between public and private pensions to an extent, many of these are now choosing to encourage the development of fully funded private pensions, he adds.
Adrian Fowler, European equities investment manager for Aberdeen explains changing demographics with increasing ratios of retirees per worker are resulting in an ever-increasing burden on state pension schemes.
Alzola says: "The stated aim of these reforms is to provide the means for higher returns for investors and savers, and help reduce the long-term burden for state pension systems."
Alzola also believes the changes will also bring about the associated reduction in non-wage labour costs. This should facilitate the creation of new jobs, as the rise in social contributions needed to finance state pensions is capped.
The basic premise of the overhaul implies a relatively high ceiling for investments in equities. Current national restrictions are quite limiting; for example 35% in Germany, but Alzola foresees this rising to the region of 70%. Fowler says: "Equities are the natural home for pension fund assets. Harmonisation of the pension fund industry means that European pensions will be managed increasingly by companies with cross-border asset management experience."
UK and US companies will therefore be the winners, owing to the lack of credible, experienced European competition, he adds.
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