A) The System
In many countries the total pension claims consists of the following elements:
Pillar 1 : State Pensions
Pillar 2 : Occupational Pensions
Pillar 3 : Private Pensions/Annuities and related Private Wealth
Within the EU we see that many Member-States have their own interpretation of how the total pension rights should be construed.
Some Member-States like Germany and Holland have a clear division and balance between these pillars. Other countries like for example France have a large focus on State Pensions and much less on Occupational Pensions.
Whereas some countries have linked the additional Pillar 3 tax benefits to already existing Pillar 2 benefits, some other countries do not even have tax benefits for Pillar 3 at all.
When looking at the pension claims per Member-State, it is good to know the division between these three pillars. Even if it is just for your own understanding and oversight.
We will now focus on the most crucial elements of pensions within the EU.
B) State Pensions
Despite of the existence of the EU, Member-States have State Pension Coverages which are different on my relevant aspects:
Mandatory or Voluntary Participation
Both regarding State Pensions as employee status related other Social Coverages, it is good to see in each country what kind of mandatory and voluntary coverages are offered.
Regarding possible voluntary coverages you might have to watch out for a certain limited amount of time in order to apply on time. Due to the historically low interest rate, you might want to be careful with buying additional voluntary claims.
Minimum Required Participation
Within the EU many Member-States have a different kind of premium and pension claim coverage.
Luxemburg only gives a legal right to State Pension Claims once the participant has participated for at least 10 years.
In Germany this term is 5 years but if required, time spent in participation of the State Pension of another Member-State can be included in order to make the 5 year term.
In Holland there is not yet any such minimum required participation term. Each year of participation counts and provides additional pension claims.
Amount of Pension Claim
Regarding the amount of the full State Pension Claim, there is also a substantial difference between the Member-States.
- In Germany the full amount of State Old Age Pensions amounts to annually pre tax € 9.600,-.
- In Spain the full amount of State Old Age Pensions amounts to annually € 4.756,-/€ 10.152,-.
- In the UK the full amount of State Old Age Pensions amounts to annually pre tax € 9.913,-.
- In Holland the full amount of State Old Age Pensions amounts to annually pre tax € 10.660,-.
Developments within the EU: Retirement Age
Due to the increased longevity coupled with the low interest rate, Member-States have difficulty with funding their State Pensions in a structural healthy manner.
One of the most relevant and far reaching developments, has been the increase of the retirement age until now and in the near future:
- In Germany the retirement age for the State pension soon) amounts to age 65,6 – age 67.
- In France the retirement age for the State pension (soon) amounts to age 67.
- In Luxemburg the retirement age for the State pension (soon) amounts to age 65.
- In Spain the retirement age for the State pension (soon) amounts to age 67.
- In Italy the retirement age for the State pension (soon) amounts to age 66,6.
- In Portugal the retirement age for the State pension (soon) amounts to age 66,25 – age 67.
- In Holland the retirement age for the State pension (soon) amounts to age 66 - age 67,25.
C) Governmental Oversight by Supervisory Body
In Europe the oversight on insurance companies and pension funds is being effectuated by EIOPA: The European Insurance and Occupational Pensions Authority.
EIOPA's Core Responsibilities are
- to support the stability of the financial system;
- transparency of markets and financial products;
- the protection of policyholders, pension scheme members and beneficiaries.
EIOPA is Commissioned to
- monitor and identify trends, potential risks and vulnerabilities stemming from the micro-prudential level, across borders and across sectors.
EIOPA's Main Goals are
- Better protecting consumers, rebuilding trust in the financial system;
- Ensuring a high, effective and consistent level of regulation and supervision taking account of the varying interests of all Member-States and the different nature of financial institutions;
- Greater harmonisation and coherent application of rules for financial institutions & markets across the European Union;
- Strengthening oversight of cross-border groups;
- Promote coordinated European Union supervisory response.
EIOPA and Occupational Pensions
Under the Regulation establishing EIOPA, one of EIOPA's main tasks is to contribute to a sound, effective and consistent level of regulation and supervision of institutions for occupational retirement provision (IORPs) and to ensure that risks related to IORPs activities are appropriately regulated and supervised.
Since early 2011 the most high profile part of EIOPA's work in the occupational pensions area has been its contribution to the review of the Directive on the activities and supervision of institutions for occupational retirement provision (the IORP Directive).
EIOPA on Personal Pensions: PEPP
The economic and demographical situation in the European Union makes it problematic for any Member-State to deliver adequate, safe and sustainable pensions to its citizens. In this context the EU acknowledges the need to put in practice appropriate strategies and policies for the benefit of EU citizens.
During 2013, EIOPA upon the request from the European Commission started its work on prudential regulation and consumer protection measures that are necessary to create an EU single market for personal pensions. This work resulted in the publication of the Preliminary Report "Towards an EU single market for personal pensions" submitted to the Commission in 2014.
In 2016, EIOPA submitted to the European Commission its Advice on the development of an EU Single Market for personal pension products (PPP) recommending the development of a standardised Pan-European Personal Pension Product (PEPP) regulated by a 2nd regime for personal pensions.
EIOPA proposed the PEPP as being the best option to promote the Single Market and to strengthen the regulatory framework for the benefit of protection of consumers.
EIOPA's future role in PEPP
According to EIOPA PEPP is designed to become a truly European, safe, transparent and cost-effective long-term retirement savings product that will offer pensions savers an entirely new personal pensions framework for saving for adequate future retirement income.
Due to this European nature and the conceptually inherent requirements on standardisation and portability, EIOPA, as a European supervisory authority can ensure consistently high standards throughout Europe. EIOPA believes a central authorisation hub and a key contact point for accessing information on PEPP’s is crucial for the PEPP's success.
According to the European Commission's proposal, EIOPA would take on the responsibility in ensuring fully consistent quality criteria for the authorisation, licensing and therewith pass-porting of PEPP.
EIOPA's mandate to promote supervisory convergence throughout Europe, close cooperation with and amongst national supervisory authorities is of paramount importance for the proper functioning of the European internal market.
EIOPA is of the view that a stronger coordination and collaboration in view of the development of supervisory plans and approaches for PEPPs is needed to support the initiative of a truly pan-European product.
Key Values of EIOPA
One of EIOPA’s strategic goals is to act as a modern, competent and professional organisation, with effective governance arrangements, efficient processes and a positive reputation.
The following key guiding principles have been developed in order to support the Authority in achieving this goal:
- Good Administrative Behaviour;
- Public Access to Documents.
To account for the specific conditions in national markets and nature of financial institutions, the European System of Financial Supervision is an integrated network of National and European supervisory authorities, that provides the necessary links between the macro and micro prudential levels, leaving day-to-day supervision to the national level.
EIOPA is governed by its Board of Supervisors, which integrates the relevant national authorities in the field of insurance and occupational pensions in each Member State.
The European Union's national supervisory authorities are a source of expertise and information about insurance and occupational pensions matters.
EIOPA is an independent advisory body to the European Commission, the European Parliament and the Council of the European Union. It is one of the EU Agencies carrying out specific legal, technical or scientific tasks and giving evidence-based advice to help shape informed policies and laws at the EU and national level.
EIOPA Video on Oversight
A short overview on EIOPA's approach to oversight and supervision, presented by Patrick Hoedjes, Head of Oversight and Supervisory Convergence at EIOPA:
D) Financial Services License
Within the EU the rule is that institutions who are required to have a license, need to request it in the Member-State where they are residing. In which procedure they have to meet all the local requirements and due to which they fall under the oversight of that national supervisory body.
After the license has been granted, they can operate within the EU as the license functions as a passport within the EU.
E) Occupational Pensions Provision in EU Policy
The ageing population in the European Union and the effects of the financial and economic crisis have strained the sustainability of public pension schemes in Member-States (MS).
To ensure adequate incomes for people after retirement, many MS are putting increasing emphasis on supplementary forms of retirement income. These include occupational pension schemes that provide retirement income based on employment earnings during working life.
Whilst MS are responsible for the design of their pension systems, occupational pensions affect, or are affected by, various EU policies and concerns. Free movement of workers means that workers should preserve rights in occupational pensions when they move to another MS.
EU-wide companies need cost efficient ways to provide pensions to workers in different MS. The European Commission has proposed, or will, improvements in both areas.
Workers also need cost-effective protection against risks (including employer insolvency) and reliable pension information to make good retirement decisions. Increasing reliance on occupational pensions may put women at risk of poverty in old age.
Though MS will continue to support a very wide variety of approaches to occupational pensions, the EU can contribute to ensuring that citizens enjoy an adequate and sustainable income in old age
F) Collective Occupational Pensions
In each country you might start to work you will have to check if there is a mandatory or voluntary participation to an existing occupational pension plan.
In countries like France and Holland there are many such mandatory regulations.
Within Europe the differences between occupational pensions are huge regarding tax and civil law requirements as well as product specifications and pay-out possibilies.
Whereas one country like the UK has the Lump Sum possibility, Holland only allowes lifelong annuities. Whereas the UK and Holland allow a pure DC plan, Germany only allows DC plans if there is a certain minimum insured outcome.
Collective Pan European Pension Plan
A decade ago it was not really possible for an international company with representations in many countries in Europe, to have all these occupational pensions gathered in one plan. The highest extent of such accumulations regarded DC plans only. Due to the impact of DB regulations per country, DB plans were never included in such an accumulation. Which existed especially in Ireland and Luxemburg.
Recently progress has been made in this respect. Some claim that DB plan now can be totally included in such an accumulation. We doubt that at the moment but do expect that within several years this will indeed be more feasable.
In the end it is about efficiency which should be easily explained in yes or not profitable.
G) Individual Pan European Pension Plan
Relocating Expats and their Pensions
Many expats in Holland have already resided in other countries and probably will do so again in the near future. These expats might end up with many different kind of pension claims in several countries.
Of course this is not very convenient and also not good for the oversight. In order to prevent these issues, expats can try to transfer all their corporate pension claims to one final corporate pension claim. Is this as easy as it sounds?
Such a transfer of pension claims raises several issues:
- Each country has its own legal and tax regulations about the possibility of such an incoming or outgoing pension capital transfer.
- Transfer of value is a rather complex issue as it regards legal/tax/actuarial/product specifications.
- Even when transfer of pension capital is possible from a legal and tax point of view, expats still have to decide whether it is also desirable to transfer. Differences in the nature of pension claims for example might make transfer of pension capital not attractive at all.
Ideal Solution for Expats in EU
In order to prevent all these issues, it would be ideal for expats in the EU to have their own personal corporate pension plan, which they can use in each country in the EU they reside in.
This would prevent transfer issues and the expat could also choose the kind of pension plan that best suites his wishes.
Due to several legal matters it is not yet possible for an expat to have and use such an individual corporate pension plan in the EU. It is also highly unlikely that this will change in the near future.
New EU Alternative: PEPP for Expats
In June 2017 the European Commission introduced ‘PEPP for Expats’.
This newly to be created Pan European Pension Plan (PEPP) should come within reach of every EU citizen in order to build up sufficient retirement coverage with tax benefits.
The PEPP will be a voluntary scheme and offered by a broad range of financial companies across the EU. It has to be available to savers as a complement to public and occupational pension systems, alongside existing national private pension schemes.
Which results in the following summary regarding pension accumulation:
Pillar 1: State Pensions
Pillar 2: Corporate Pensions
Pillar 3: Private Annuities like PEPP
Positive aspects of PEPP for Expats
1) The expat will be able to use his PEPP in the whole of EU without any transfer of value issues. Which is a substantial improvement and cost reduction.
2) Expats who currently do not have any pension claim can use the PEPP to start with building up pension claims with tax benefits.
3) The expat can choose the PEPP product he prefers and also buy it from the financial institution he prefers.
4) Many employees and expats have a (severe) lack in pension rights. With the current very low interest rate and the increasing life expectancy these problems will not go away automatically. As many Member States have to look at the future funding of state pensions, which might lead to a reduction thereof, it seems almost inevitable for a PEPP to be useful.
Critical aspects of PEPP for Expats
1) The essence of optimal pension planning is to reduce costs and invest in the best way possible. Cost reduction is best done through a collective approach. As the PEPP does not have a collective but individual nature, that does not really give the PEPP the best starting position for all important cost reduction.
2) The EU Commission advises Member States to provide tax benefits for citizens who have a PEPP. As the alternatives like corporate pensions also will have tax benefits, this sounds plausible. But the big issue is if and if so how much the tax benefit will amount to.
Support for the PEPP
Besides the EU Commission, there is substantial support for the PEPP from the European Parlement and from the European Insurance and Occupational Pensions Authority called EIOPA.
EIOPA is the European supervisor on insurance and pensions and has an important role and fine reputation. Its very positive attitude towards the PEPP is relevant.
We will follow the process of how the EU tries to create the PEPP as viable alternative for corporate and state pensions in a positive critical manner.
We expect that the deciding factor for the creation and success of the PEPP will be to what extent Member States are willing to provide tax benefits for the PEPP owner. As well as the question who within the EU will fund those tax benefits!
In Holland the tax benefits for corporate pensions are more substantial than tax benefits for Pillar 3 ‘s private annuities.
H) News July 2018
Germany’s institutional investors: ‘two camps’ on sustainable investments
Institutional investors in Germany are split in two camps when it comes down to the sustainable investments, according to research by Union Investment in collaboration with Professor Henry Schäfer from the University of Stuttgart.
The survey of over 200 institutional investors found that 65% said they were taking account of sustainability criteria in their investment decisions, compared with 48% in 2013. However, 35% do not consider environmental, social and governance issues as relevant to them.
The research suggests that the participants, which have assets under management of € 6 trilion, are split into two camps:
On one side, there are still sceptical investors who are concerned that investing sustainably might lessen their chances of achieving their investment objectives. But on the other hand, there are investors whose practical experience with sustainable investments has been predominantly positive.
Also the research found that sustainable investments are more popular with investment management companies, church organisations and charitable foundations. Of the respondents from these participant groups, 91% and 88% respectively were using sustainable investment strategies.
However, the proportion of pension providers/pension funds, large companies and credit institutions that invest sustainably is significantly lower at 59%, 43% and 39%.
The sentiment index for sustainable investment, created on the basis of Professor Schäfer’s investor survey, rose by 3.5 points year-on-year to 22.9 points and thus continued its moderate upward trajectory of recent years.
The index measures the attitude of German institutional investors towards sustainable investment on a scale from -100 to +100. Schäfer said the index shows that the acceptance of sustainable investment is gradually growing among investors.
“But there is still much room for improvement. Compared with other European countries, Germany is still not even close to exploiting its full potential in this market. The number of sceptics in Germany is declining very slowly.”