While cross-border pensions won't solve the demographic crisis in Europe, enforcing the current EU law that already provides for free access to foreign insurers into all EU markets will allow greater choice
I spent some time recently sitting in a rather airless conference room in Brussels with 40 or so financial services executives from across Europe. We were actually discussing something rather important - the development of the European Single Market in financial services. And one of the topics which came up most frequently in discussion was the cross-border market in pensions. Indeed, several of those present became quite passionate about it.
Why? Well, as any reader of any newspaper in Europe will be well aware, we face something of a pensions 'crisis' in the EU. Some countries, including Britain - although you would not believe it from the UK headlines - are relatively well placed compared with others. But we all face the economic and social challenge of an ageing population and low birth rate. Some pretty fundamental thinking is required in European capitals to deal with these trends. The ratio of workers to pensioners is expected to halve over the next 40 years. Some estimate the eventual pensions shortfall will be over e400bn per year. Solutions will involve significant changes to state pensions and better incentives for individuals to save more. Many commentators believe that it would be helpful if pension providers could market pensions across borders, and if people could take pensions with them when they moved from country to country within the EU.
In 2003, the EU adopted the Institutions for Occupational Retirement Provision Directive (IORP) aimed at facilitating the cross-border market in pensions. Since then, we have seen a report from the European Federation for Retirement Provision emphasising schemes for employees of multi-nationals, and the European Financial Services Roundtable's report 'One Europe, One Pension'. The latter highlighted the differences between existing national pension rules which currently get in the way of the cross-border market. And the group of industry representatives I mentioned earlier produced their own report for the EU Commission on insurance and pensions, suggesting the next steps following the EU's soon-to-be-completed Financial Services Action Plan.
A lot of reports. Many come to rather similar conclusions: more needs to be done to facilitate cross-border pensions. But what do people actually mean by cross-border pensions?
What do they mean?
Cross-border pensions can mean at least three different things. Firstly, they may be an occupational pension set up on behalf of an employer operating in more than one EU member state, providing employees with retirement benefits in different countries. Secondly, there are personal pensions provided in one member state to individuals based in another. Finally, there are various retirement benefit packages provided for high net worth executives with highly mobile careers. The current volume of the cross-border pension business across all three categories is very low, and most fall in the last category.
So, what might be done to improve the prospects for cross border pensions, and what benefits might we see? As is so often the case, it is easier to list those problems which cross-border pensions will not solve. But having done so, the real prospects - limited but important - will be easier to discern.
How can they help?
Cross-border pensions are not going to solve Europe's pensions crisis. Each country will need to adopt solutions which recognise and work with the grain of the complex web of national social security and pensions legislation, custom and practice. An active cross-border pensions market will not greatly stimulate extra saving at national level, and we should not fool ourselves that it will.
Nor will cross-border pensions fully address the challenge of pension provision for multinationals. The costs of setting up and operating a single scheme will often outweigh the benefits. Most multinationals currently offer a different pension arrangement in each country in which they have a presence. These reflect local preferences, local pay arrangements, local social security provision and local tax requirements. Changing these local arrangements can be complicated and expensive. The savings offered by centralised investment management, administration, and monitoring need to be substantial before they outweigh the costs.
So, might 'non-mobile' individuals be attracted in large numbers to buy pensions directly from pension providers in another member state? Again, probably not. Most savers prefer to deal with local and familiar providers and intermediaries. Tax and social security issues already mentioned, add to the disincentives. Perhaps most importantly - a point often forgotten - in many countries individuals already have access to foreign providers who have established themselves in the local market. This gives a clue to what really needs to happen now
You might be forgiven for thinking that all this means that the EU Single Market for pensions could only flourish if all the national laws - tax, social security, etc - were harmonised. Some people do indeed argue this. Happily, they are wrong. I say happily, because such a programme of harmonisation (a) is politically impossible for the foreseeable future; and (b) would increase costs for domestic pension providers with adverse effects on the price (and hence availability) of the domestic savings products which will be needed to solve the pensions crisis.
The solution lies in a point I made earlier. Plenty of people in the EU already buy their pensions from foreign providers selling locally. But this is only really common in one or two countries (including the UK). We need to address the reasons why some EU countries do not yet allow their citizens the free access to locally established but foreign-owned pension providers which others already enjoy. Genuinely free access for foreign insurers and pension providers into each EU national market will create greater choice, improve competition and reduce costs for employers and consumers alike.
Working with eu law
Indeed, existing EU law provides for exactly this. But the local implementation of that law has been - shall we say - patchy, at best. The insurance industry is arguing to the EU Commission, and the new multinational committees of EU financial services regulators, that they need to stop legislating and turn their attention to better implementation of the existing law. If they do, we can really make a difference to ordinary customers (and help close the pensions gap).
So where does that leave the 'classic' cross-border pension? In the short to medium-term, and despite the challenges outlined above, there will undoubtedly be some multinationals for whom the benefits of a single scheme will outweigh the costs. This is most likely for companies which operate in only a few countries, and will depend on a flexible approach from national tax, social security and consumer protection authorities. One possible way of helping this to happen is a set of optional, 'alternative' EU rules which would apply only to cross-border business, so avoiding national complications altogether. While the technical and political problems are formidable, this is an idea worth investigating, and UK insurers are starting to do so.
Cross-border pensions might also be of interest to certain groups of individuals for whom they might offer substantial advantages compared with domestic pensions. These might include relatively wealthy individuals and expatriates. UK insurers are therefore thinking about new, pan-European products for such markets.
To sum up, UK insurers take a pragmatic view of the prospects for cross-border pensions. We do not believe that there is an urgent, mass-market demand for such pensions. But we do think that some pragmatic steps can be taken to help those limited markets where they may make sense.
We also believe, strongly, that the real prize for most EU citizens will be a genuinely open domestic market. We will continue to campaign vigorously, in Brussels and elsewhere, to make this a reality.
Some EU countries still do not yet allow their citizens the free access to locally established but foreign-owned pension providers which others already enjoy.
The demographic crisis in Europe will not be solved by the introduction of cross-border pensions.
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