Pan-European pensions are slated to take effect next year. Theoretically, this means workers will be able to seamlessly transfer their pension funds between any of the countries in the EU. But some say the legal structures are far from prepared for mobile pensions.

"It sounds good but it will take a lot time before we will have a pan-European pension scheme," said Gijs Celis, a tax manager at PricewaterhouseCoopers in Brussels.

By September 2005, all EU Member States will have to implement the directive put forth by the European Commission on pan-European pensions. But because of a lack of tax harmonisation between countries, many argue that pan-European pensions will not be fully functional for some time to come.

"We now have the legal structure but not the harmonised tax structure so that's the major problem," Celis said.  "Once that is done, it will work. Until that moment, companies will be very reluctant to go for this. It's a shame because it's hindering international mobility."

There are three primary reasons why reforming the European pension system is important, argues Robert Holzmann of the World Bank in his paper "Toward a reformed and coordinated pension system in Europe: rationale and potential structure."

As the population ages on the continent, government budgets will be increasingly burdened by already high pension expenditures, which in most western European nations is more than other industrial countries. Two, current pension provisions are becoming inadequate. "Third, globalisation creates opportunities and challenges, and to deal with them effectively requires, inter alia, flexibility and better functioning markets," writes Holzmann.

More and more, multinationals are asking if pan-European pensions will work for them, said Celis. All companies, he said, have to evaluate whether it is more efficient to continue with the status quo or deal with potentially costly tax liabilities of moving pension schemes from one country to another.

Tax discrimination remains one area that is preventing pan-European pensions from being implemented, according to the "European Institutions for Occupational Retirement Provision 2005" (EIORP 2005) report released last fall by the European Federation for Retirement Provision (EFRP).

In recent years, the Danner and Skandia cases in the European Court of Justice (ECJ) made examples of nations that allowed tax discrimination. In both cases, the court concluded that contributions were tax deductible when made to pensions schemes based in other Member States.

The EFRP applauded the EU for in February 2003 initiating "a string of infringement proceedings to force Member States to eliminate discriminatory regulation against cross boarder providers of occupational pension schemes," according to the EIORP 2005. Those states included Belgium, Spain, France, Italy and Portugal and later that year the United Kingdom and Ireland. 

Such actions "give us enough hope that pan-European pension funds will be a reality sooner than later," said Angel Martinez-Aldama, the head of Spain's pension association and vice chairman of the EFRP, in the foreword to the new edition of "Pension Funds and their Advisors."

"The EFRP will concentrate its efforts in achieving a harmonised implementation in the 25 European Union countries, although it will not be easy because of the differences in occupational pensions around Europe," he wrote.

Indeed, there is still more work to do before pan-European pensions become a working reality. The EFRP report outlines a plan for implementing pan-European pensions which "focuses in particular – but not exclusively – on taxation aspects since these have been identified as the major hurdles to EIORPs," says the report's executive summary.

Even Eurostat – the EU's statistical office – agreed in a book it published in August which noted that "the treatment of taxes raised on pensions is a difficult area, both from a conceptual and practical point of view, which would benefit further work."

Not only do nations have to implement the pan-European pension directive laid out by the EC by September 2005, but they must also ensure that their tax regulations harmonise with the new provision.

Jeremy Hill, a consultant with Mercer Human Resource Consulting, said Spain is taking a practical approach by addressing both implementation of the directive and tax harmonisation at once.

He speculates that history suggests not all of the other 24 European Union nations will be as effective at implementing the pan-European pension directive by the deadline next year.

"There's still quite a lot of work to be done to come up with something practical and worthwhile for multinationals," he said.

Even if all the tax barriers are overcome, a larger issue may be looming in the background.

"I think the tax obstacle to pan-European pensions is easier to overcome than a lack of trust between the different regulators and supervisors," said Alan Pickering, chairman of the EFRP, in an August interview with Reuters.

Pickering is concerned that in the wake of the many corporate scandals, regulators may be "overly scrupulous," according to Reuters.

"There's a real danger in this post-Enron environment that regulators will be watching their own backs and fail to trust one another," he said. "The key [to success] is the host country having confidence in the home country's ability to make everything kosher."

August 2004

Jennifer Hamm is a freelance journalist based in the Netherlands.