Ladies and gentlemen

							European Parliament Pensions Forum Portability of Pension Rights

EUROPEAN PARLIAMENT, 20 APRIL 2004 Dr. Withold GALINAT Benefits Policies & Coordination BASF AG, Ludwigshafen (D) EFRP representative to the European Commission Pensions Forum

Ladies and gentlemen, Thank you for inviting me as the representative of the European Federation of Retirement Provision (EFRP). First of all, before discussing the portability issue, I think it is worthwhile to note a few basic points:     occupational pensions still are typically a benefit provided voluntarily by employers as a supplement to state pension benefits. occupational pensions will become more important in the future because state pensions are expected to deteriorate due to demographic pressure; occupational pensions are the financially most significant benefit provided by employers. I mean to say : occupational pensions are very expensive; In some Member States, such as Sweden, Denmark or the Netherlands industrywide pension plans are common since they are the result of collective bargaining. But, in most Member States, occupational pensions are typically provided to about 30-60 per cent of the workforce; therefore, I would say, that the more important task we appear to face nowadays is to increase the availability of occupational pensions rather than optimise the terms and conditions under which pensions may be accrued or transferred; occupational pensions approaches in the EU are quite diverse; each of these approaches represents a special cultural and economic history leading to a fragile balance of benefits and costs; because of this any hasty measures in respect of defining a new balance via a set of pan-European minimum standards will most likely have negative, counterproductive side-effects; for this reason subsidiarity and voluntariness should be sought rather than uniform EU-measures;

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Turning to the portability of occupational pensions, it is certainly desirable from an employers’ point of view to have cross-border mobility. However, I personally challenge the hypothesis that we have significant cross-border mobility of employment in the EU and that this cross-border mobility of employment will considerably increase in the future. Because of language, family-relationships and culture EU-citizens have a very strong tendency to look for employment within a member state. The only significant cross-border employment mobility is most probably within multinational groups whereby an employee is delegated to work temporarily in another member state for about 3 to 8 years. I would like to add that I

European Parliament Pensions Forum - Portability of Occupational Pension Rights Dr. Withold GALINAT EUROPEAN PARLIAMENT, 20 APRIL 2004

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have as of yet not seen any convincing statistics which validly and reliably address this topic. When the issue of portability is raised by the EU-commission one could find it to be a “Trojan Horse”. Portability is not meaning only the transfer of accrued pension entitlements from one occupational pension scheme to another. No! Within the Trojan Horse we also find the terms and conditions under which occupational pension entitlements are  becoming vested and  indexed prior to payment, as a way of preservation of vested pension rights. As to portability per se, the EFRP welcomes all sensible measures which allow for the transfer of accrued pension assets from a pension scheme in a member state to another one a different member state. This requires two major things: On the one hand cross-border transfers of pension assets from a pension scheme in one member state to a pension scheme in another member state tend to be suffering from tax hurdles. These hurdles must fall. It must become possible to transfer pension assets across EU-borders without negatively affecting both the tax situation of the companies and the employee involved. On the other hand, it must become possible to free an employer from the liabilities under a pension promise by transferring a pension entitlement out of a member state. As an example, in Germany this is not possible under current legislation. If a vested pension entitlement is transferred to another member state, the transferring employer is always under risk that the employee later may come back and claim for payment of the pension entitlement transferred abroad because the Occupational Pension Plans Act allows only for transfers within Germany. The EFRP recognises that it is vitally important to provide the mobile employee with information that allows him or her to make an informed choice about whether or not to transfer the accrued, vested pension assets. However, the EFRP wants to emphasise that providing such information is not for free. It bears a cost. This cost comes from additional administration. It is hard to conceive to leave those costs with the employer which the employee is leaving nor could one imagine to impose it on the non-mobile employees. Therefore, isn't it logical that all administration cost associated with portability should be borne by the mobile employee? A further issue as to portability per se is about money. More concretely, it is about the amount of pension assets representing the occupational pension entitlement accrued prior to leaving. A layman may assume that there is something like a “true” capital value of the pension entitlement and that this can be determined quite easily. This is the case for defined contribution pensions. There the respective amount is simply the value of the accumulated contributions with earned interest. Unfortunately, this is not the case for defined benefit pensions. For instance, if the pension entitlement is financed via direct insurance the calculation basis is different as compared to the calculation basis used under a pension fund. But even between pension funds the valuation basis may differ significantly. The reason for this is the risk perception and risk management approach chosen by the employer and the

European Parliament Pensions Forum - Portability of Occupational Pension Rights Dr. Withold GALINAT EUROPEAN PARLIAMENT, 20 APRIL 2004

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trustees for ensuring that adequate assets are held for the payment of the pensions. Some employers and trustees want to be more certain than others that the promised pension can actually be paid. This difference in risk perception and management leads to different transfer values. This situation is further complicated by the fact that we still have inflation rates, salary developments and mortality rates which are different between member states. The only solution which I see to disentangle this “Gordian Knot” is to base portability on accrued assets rather than accrued entitlements. The amount transferred must be calculated on the calculation basis chosen by the employer or the trustees of the “transferring” pension scheme while this amount is then translated into a pension entitlement on the calculation basis of the receiving scheme or employer. This solution has the “charm” that portability between defined benefit and defined contribution schemes – and vice versa - would also be possible. There is one final consideration in respect of portability per se which should not be forgotten: who has the right to determine whether or not pension assets are transferred from one occupational pension scheme to another? As mentioned earlier, occupational pensions are a voluntary benefit. In a voluntary environment there is no room for forcing trustees or an employer to accept the pay out or pay in of a transfer value. Hence, it would be logical, if portability requires the consent of all parties involved, the mobile employee, the trustees/employer of the pension scheme from which pension assets are moved out and the trustees/employer of the pension scheme into which assets are transferred. Now back to the Trojan Horse, that is to those aspects which are discussed by the EU-commission under portability but which are not portability per se. The first aspect relates to waiting and vesting periods. It is fair to say that these vary considerably in the EU. The range is from immediate vesting to no vesting at all. From an employer perspective, decreasing the waiting and/or vesting periods simply means additional costs. Given the current economic situation this is very hard to take and may further negatively affect EU competitiveness. The second aspect relates to indexation of the pension entitlements of vested leavers. In this context, it must be considered that indexation is almost not justifiable under flat rate and career average pension promises because then employees leaving an employer would be receiving higher benefits than those employees who continue to work for their employer and stay. Moreover, indexation of pension entitlements of vested leavers would imply tremendous additional costs because it is not the general practice. To make this negative legal change cost-neutral, employers could be forced to re-calculate the distribution of the budgets for their occupational pensions leading to a decrease of existing and new pension promises. This cannot be what the European Commission tries to achieve by bringing indexation into the debate ! Let me summarise : 1. Portability per se should be sought. In particular, the tax barriers should be removed which come into play when pension assets are transferred from one EU-member state to another.

European Parliament Pensions Forum - Portability of Occupational Pension Rights Dr. Withold GALINAT EUROPEAN PARLIAMENT, 20 APRIL 2004

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2. Any rules on portability should adequately consider the voluntary nature of occupational pensions and their diversity. 3. Simple information requirements should be intended and all portability costs should be borne by the mobile employee. 4. The transfer of occupational pensions should be based on the transfer of assets rather than the transfer of entitlements. 5. Portability should include the consent of all parties involved. 6. The real issue is to expand the coverage of occupational pensions, i.e. to increase the number of employees who are entitled to occupational pensions. This is necessary in order to have a supplement available for the expected decline of income from state pensions. To increase coverage, it is pivotal to simplify matters and ensure that occupational pensions can be provided in a cost-efficient way. Any stringent additional requirements for harmonising waiting and vesting periods as well as indexation of vested entitlements will be counterproductive and should be avoided. Ladies and gentlemen, thank you very much for your attention!