| Pensions in the European Union: nowhere near unity |
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| 12/09/2004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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In 2002, a doctor reminded Europe that unity was still a far-fetched idea when applied to the world of pension. Discriminatory practices of European Member States were indeed bluntly depicted when the European Court of Justice ruled that the Finnish government was not in its own right when withholding the tax deductions on the German pension contributions of Doctor Danner, a German living in Finland. Differing tax treatment is however only one of the most visible sign of the European pension puzzle, whose various regulatory pieces lead to huge variations in how pension funds allocate their assets. Harmonisation might be on everyone's lips, but it is easier said than done. Indeed, further to widespread taxation disparity and outright discrimination among the EU Member States, a quick look at the various regulations of EU member states reveals an equally diverse landscape in terms of investment regulation. Some governments do not impose any limit whatsoever on their pension funds, others impose stringent regulation that leave the provider of supplementary pension benefits without much liberty in terms of investment decision. Portfolio limits on selected European pension fund investment in domestic asset categories (2002)
Space for investment While the so-called "first pillar" of the pension system – the public pension generally available to the population at large or to specific trade groups – is managed on a pay-as-you-go basis (PAYG) in almost all EU Member-States, an increasingly large proportion of supplementary pension schemes is managed on the basis of capitalisation in many countries. Pension funds of the second pillar and third pillar, funded through capitalisation, are subject to a wide array of regulations, depending their country of origin. Sweden, with its system of buffer funds, and Finland are the only European countries where the contributory pension is financed through capitalisation. In the UK, the largest pensions market in Europe with estimated total assets of €1,159 billion according to Mercer, people can opt out of the statuary earnings–related fund in favour of private occupational or personal pension provision, creating a huge space for pension investments. In addition, Denmark, Ireland and the Netherlands have well-developed capital funded pension funds. New spaces for pension investments are being created throughout Europe. According to Mercer, Sweden and France are among the only countries with little current need for supplemental retirement programs – but that might change quite soon. France, where the various "caisses de retraites" cover most employees, but which is handicapped by a large pension deficit, is a case point with this respect. The French government has indeed gone to great extent to reform the strained pension system, creating a space for capitalised individual pension plans through the loi Fillion enacted on 24th August 2003. Regulatory categories A first category comprises countries where pension funds encounter almost no portfolio limit with regard to their asset allocation in domestic assets. This category includes countries such as Ireland, the Netherlands, and the United Kingdom, where complementary private pension funds are widespread in the population due to the low level of benefits provided by the public pension scheme. UK pension funds' fervour for equities, dubbed as a "cult for equity" with allocation traditionally lying anywhere between 70% and 90%, has changed in the last couple of years due to the beating taken by the market and new accounting standards leading to more volatility in corporate accounts. In contrast, countries with heavier investment regulation – which in any case often leaves less space for complementary pension benefits – weight their investment portfolio more heavily toward bonds. Average pension fund asset allocation  Source: European Pension Fund Managers Guide 2003, Mercer Investment Consulting On the other hands, some pension systems are fraught with investment portfolio regulation: Austria, Germany, Finland, Spain, and Sweden, among others, cap investments in most asset class. The leader in investment regulation is Sweden, which caps all asset classes in which its pension funds can invest. In between those two extreme categories fall countries such as Italy, which imposes only one investment limit on real estate, that the investment be not direct, or Belgium, with only a 10% limit on private equity. The average pension fund asset allocation among European Member States varies widely along the regulatory lines. In the end, where no limit is set on any given particular asset class, pension funds tend to use their liberty and invest more, such as in the UK. Julien Laplante |
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