Hard lessons on pensions

Our wake-up call about the importance of Europe for UK pensions can be

precisely dated – it was May 17, 1990.

That was the day the European Court of Justice handed down its judgment in

the case of Barber •GRE. On that day, we learned that pensions count

as pay in the context of Article 119 of the Treaty of Rome, which says that

employers must not discriminate on a sexual basis for the purposes of pay.

Since then, there have been other cases to clarify the precise boundaries

of sexual equality in pensions. But the hard lesson we learned on May 17,

1990 was that we ignore European issues at our peril.

The Pensions Green Paper announces a major change that was already in the

pipe-line concerning age discrimination. By 2006, every EU member state

must have a law that forbids employers discriminating on grounds of age.

Today, an employer may say “you have reached the normal retirement age of

the pension scheme, so here is your pension and cheerio”. By 2006 at the

latest, the last two words of that sentence will have to be deleted.

This does not mean that the concept of a normal pension payment age will

disappear – in the context of defined benefits, how could it? But if there

is a normal pension payment age, it will not also double as a compulsory

retirement age.

An even more fundamental European change currently hangs in the balance.

This is the draft institutions for occupational retirement directive, which

is about prudential supervision of institutions for occupational retirement

pension.

It covers things like freedom of investment for occupational retirement

pension schemes and the monitoring of their financial soundness to meet

their contractual obligations. The reason why the draft IORP directive

hangs in the balance is because of different views on it between the

European Commission and the European Parliament.

There is a huge amount of politics in this. For example, there is a strong

German lobby to require occupational pension schemes to provide “biometric

risks” insurance, by which they seem to mean longevity, disability and life

cover. Member states that already have strong funded occupational scheme

provision are opposed to this, fearing it will deter employers from

voluntarily sponsoring pension provision. The draft IORP directive is one

step towards a single European market for pensions but don&#39t hold your

breath for this objective being achieved quickly.

Each member state jealously protects its own sovereignty in taxation and

social security, both of which are fundamental to pension provision. ECJ

judgments such as the Danner case appear to bind member states, but for

many states (not the UK) avoiding European legal obligations is an art form.

Mr Danner, who is resident in Finland, recently won the case which he

brought against the Finnish government for giving worse tax treatment to

contributions to his German-based pension than his Finnish-based pension.

Another huge issue is whether the UK joins the euro. Of course, this is not

just relevant to pensions but there are at least three major pensions

implications. First, if our pensions are paid in euros, there is no

currency risk through having the investments backing the pensions invested

in any country in the euro zone.

The second implication leads on from the first and it is the particular

case of annuity pricing. If a UK life office is selling an annuity payable

in euros, it might as well buy , say, German bunds as UK gilts to match

that annuity. This broadens the available supply of matching investments,

and holds out the prospect of slightly cheaper annuities, as UK gilt yields

are currently less attractive than their eurozone equivalents.

The third implication is more controversial and less clear cut. It is the

risk that the UK might, through the euro mechanism, increase the risk that

it ends up subsidising the profligate state pension promises which some

other member states – notably Italy, Germany and France – have made to

themselves.

This is an issue which Westminster MPs should readily understand, given

that they have just voted themselves a fortieths final-salary scheme at the

expense of UK taxpayers.