Portable retirement planning for expats: the challenges
Expatica's financial expert Russell Hammond explores the current issues facing European portable retirement planning.
Maximising job mobility is a natural catalyst for Europe's recovery after a worldwide recession, and it goes hand in hand with the mobility of pension rights built-up within individual European nations. However, for expats living and working abroad, retirement planning can pose certain challenges.
Retirement planning for expats
Individuals who have made contributions to a state pension in more than one European Union (EU) country have long had the right to reconcile and receive their state pension if they retired in another EU country. The procedures for administering the payment and calculation of multiple state benefits have been agreed upon and implemented. However, the situation isn't quite so simple for the ‘totalisation' of supplementary EU pension benefits.
If you've worked in several EU countries, you may have accumulated state pension rights in each of them. When you come to claim your pension, you'll need to apply for your pension in the country where you either currently reside or last worked. That country is then responsible for processing your pension claim and bringing together records of your contributions from all the countries you worked in.
If you haven't ever worked in the country where you now live, you should apply to the relevant pension authority in the last country where you worked. Your application will then be processed there. Before you have reached legal retirement age in the country where you live, or last worked, the pension authority in that country will send you your pension application form. An important point to remember is that you will only receive pension rights from other countries once you have reached their legal retirement age.
Supplementary European pensions: the obstacles
So, the consolidation and ‘totalisation' of the multi-European state pension is relatively straightforward. Unfortunately, the same can't be said for supplementary European Pensions as, at present, there is no common framework in the EU that regulates the transferability of company pension rights. As a result, the difficulty in transferring supplementary occupational pension rights from one country to another has become a serious obstacle to the free movement of workers within the EU.
A key issue affecting European company pension funds is that depending on the employee's age, pension rights may be lost along with the job move, with employees getting back only their own contributions to the scheme. Such a scenario has an obvious impact on the mobility of a highly skilled, dynamic work force.
This age-related clause results in employees losing funds built up on the employer's part of the pensions scheme, and was developed in some European countries as a way of rewarding company loyalty rather than purely to provide pensions.
The EU pension debate
The European Commission first published a proposal for a directive on 20 October 2005. Originally, the proposed directive aimed to improve conditions related to the building up of rights and the preservation of dormant rights left behind in the schemes, and also increase the possibility for employees to transfer the rights to the new job.
The ability to transfer supplementary pension schemes between EU member states was part of the proposal and has been a hotly debated topic ever since. EU pension transfers are wrapped up in long-running points of disagreement between different Member States and members of the European Parliament.
Those arguing against the desire to transfer pension rights cross-EU make a case that as long as supplementary pension rights are granted in a timely way and then suitably maintained, in line with inflation for example, having the possibility to transfer those rights is not of vital importance.
That's all well and good, however, what about the necessity to ‘have a handle' on the value of one's multi-jurisdiction accumulating pension rights? Without such an accurate understanding of what has been built up where, it is difficult to ascertain whether or not we are on target to retire at the required income level. Such reconciliation is vital for pension shortfall analysis.
Emerging trends for expat pension plans
An emerging trend is for multinational firms to establish pan-European pension funds for their staff in a single EU country. Due to tax advantages, Luxembourg has already been targeted by several organisations as a base country from which to manage pension schemes for their branch organisations in several EU member states.
According to the Federation of European Employers, a number of companies have already taken advantage of the deregulated pensions environment in the European Union by forming Pension Fund Pooling Vehicles (PFPV). These are tax- and management-friendly investment arrangements that permit companies and their employees from several countries to establish a common pooled fund for pension assets. This will hold pension funds on the joint companies' behalf.
The most popular locations for the central administration of pan-European pension schemes are Belgium, Luxembourg, the Netherlands, Switzerland, and the UK.
Tax: the main stumbling block for pensions
In the European Commission's view, the real issue with the lack of portability of supplementary pensions is the obstacles it places to the free movement of workers. EC policy makers recognise that people need to be able to move around and switch jobs without complication. In order for Europe's labour market to be flexible, dynamic and competitive, any possible stumbling block to worker mobility must be removed.
The reality for most expat Europeans is that they are collecting small bits of pensions with different employers in different places. With the logistical issues associated with the monitoring and tracking of these small pension sums, the unfortunate situation is that many lose track of what has been accumulated where, let alone how effectively the underlying funds are being managed. Why can't these Pan-European pensions be consolidated? One word: Tax.
Despite the European Union's move toward pan-European pensions, tax regulations continue to be governed by bilateral treaties. Because of a lack of harmonised tax regulation between EU members, an individual's pension could end up being taxed once, twice or possibly not at all. Some countries tax on payments in (ie. Germany), some countries tax on payments out (ie. UK). The lack of harmonisation between different EU member states makes the transfer of accumulated pension rights simply untenable in most instances.
Tax is only one side of the coin when it comes to European Portable Pensions. There are operational and logistical differences between one pension fund type and another. These operational differences provide further barriers to the transfer of accumulated supplementary pension benefits across different EU member states.
Employees working across borders for the same firm may have their retirement savings administered through the organisation's pension scheme, in a pan-European scheme highlighted above. However, an employee who works for different employers in different countries could well end up with less than an individual who stayed with the same organisation. These small pensions, accumulated in various places, are likely to reach a lower value than a pension accumulated through working in an equivalent role and for an equivalent period of time, but in one place.
To protect those who have built up pension rights in one EU member state and wish to leave them where they are, the EC will now take action to prevent discrimination between domestic and foreign pension plans. If an expat has built up supplementary benefit in one EU state and then moves away, the previous country of residence may ask that the tax rebates, which were obtained while saving for a pension there, to be paid back. This is now illegal and thus any such claim should be referred to the European Consumers Centres Network for redress.
The Commission has recognised the negative implications that a reduced portability of supplementary pension rights can have on the mobility of workers. It has consulted the European social partners and suggested that they negotiate a European collective agreement in this field. However, the social partners have diverging opinions on the need to start negotiations. Thus, the ‘EuroPension' dream lives on, for now.
For a possible solution, read Portable retirement planning for expats: a solution.
Russell Hammond / Expatica
Russell Hammond is one of Expatica's financial expert and an investment specialist and senior financial adviser advising clients worldwide. Updated 2014 by Russell Hammond.
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