EUROPE - The EU Pensions Directive, which sets a framework for cross-border European pensions, has finally received approval from MEPs.
Last minute compromises on some contentious issues were key to the passing of the directive. The vexed question of biometric risk, or providing for survivors’ and disability benefits, divided MEPs. Rather than making it compulsory, an amendment gives member states the option to allow funds to offer it.
MEP Othmar Karas, rapporteur for the directive, said: “The compromise amendments seek to strike a balance between different practices across the EU.”
Another amendment saved lump sum payments at retirement, which are particularly valued in the UK as an incentive to retirement saving.
Further amendments relate to provision of information to scheme members: on an annual basis on the valuation of the fund and the level of an individual’s benefits, and secondly on the transfer of pension rights when workers change jobs.
The directive establishes home country supervision of pension schemes, and the management of pension funds according to the prudent person principle. But each home state is empowered to set its own specific investment rules to guarantee assets are invested in the best interests of members.
The directive is due to come into force within two years.
Alan Pickering, chairman of the European Federation for Retirement Provision, welcomed the directive: “At long last we are in sight of providing Europe’s citizens with the opportunity to use pan-European pension funds to save for their retirement.
“Hopefully member states will see this framework as a platform upon which they can all build rather than a straitjacket within which we must all operate.”
Ric van Weelden, a partner in the investment practice at Watson Wyatt, said: “In terms of tipping the balance in the direction of the prudent man approach and the avoidance of biometric risk becoming a burden to people taking out lump sums, I think it’s a positive step forward.”
Van Weelden added: “One group of organisations to profit from this is going to be multinationals - making it a lot easier for them to move forward to create a high degree of consistency and efficiency in the way they provide pensions to employees.”
Commissioner Frits Bolkestein said: “This directive is of particular strategic importance, not just for our capital markets, but for our labour markets and, perhaps more importantly, for the sustainability of our public finances and our pension systems as a whole.”
Europe has received a warning on the unsustainability of its state pension system from the European Financial Services Round Table (EFR), a group of 16 leading European banks and insurers.
It advocates more private funded pensions alongside reform of state pensions. “Above all we need to see a transfer to a more capital-based system, certainly for private pensions but the issue for public systems must also be debated.”
The EFR has calculated the pensions gap for European member states, that is the deficits as a percentage of GDP if governments maintain expenditures at 2000 levels but future retirees expect a state pension at the same level as those retiring in 2000. The figures show the extra annual savings needed to close the gap over the next 40 years, which range from E3.11bn for Finland to E137.46bn for France. The total funding gap for all 15 EU nations amounts to E456.39bn.
“Individuals must be encouraged to make more provision for their own retirement,” said the EFR.
“Action is required to make this alternative a practical and attractive reality for tomorrow’s pensioners.”
The EFR advocates the creation of a single market for private pensions in Europe which would drive down prices
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