Changes afoot in EU pension regulations: a European Court of Justice ruling may bring the EU closer to a pan-European pension - Global HR Agenda - European Union

HR Magazine, March, 2003 by Robert O'Connor

The European Union (EU) represents a dream that has worked. Founded by six countries as the European Economic Community in the 1950s, the EU has grown to 15 members and is poised to admit another 10. The EU has delivered peace, prosperity and a single currency.

But American businesspeople expecting to find a "United States of Europe" may be disappointed. Profound differences--legal, cultural and linguistic--remain from country to country. Among the most confusing of the differences are those that affect pensions.

Despite the establishment of the euro as the single currency in 12 of the 15 member states, EU countries still maintain their own tax regimes, including tax policies that cover pension schemes.

But things may be changing. In October 2002, the European Court of Justice (ECJ) declared that tax benefits for pension contributions should apply regardless of national borders. The court ruled in the case of Rolf Danner, a dual German-Finnish national, who moved from Germany to Finland and wanted to continue to pay into two German-based pension funds. Finnish authorities claimed he should be subject to taxes on these contributions. Danner argued that the contributions should be regarded, for tax purposes, in the same way as payments made to a Finnish pension.

The court ruled in favor of Danner, saying that EU member states would be wrong either to limit or disallow tax benefits on "contributions to voluntary pension schemes paid to pension providers in other member states."

Proponents of a borderless tax regime applauded the ruling, citing the lack of harmonized pension policies as the largest barrier to free movement of labor across borders. Companies could save money by offering one pension scheme for all their employees in different EU countries and could better recruit and relocate workers who start saving for retirement in one country and want to continue contributing to the plan while based in another country, proponents say.

Liza Hecht, a tax principal at Deloitte & Touche in New York, says the Danner ruling follows global thinking that has become apparent in international tax treaties. "I interpret the Danner case to be part of an overriding trend towards accommodating home country qualified arrangements while [an employee is] on assignment in a host location," Hecht says.

Implications

Peter Ford, partner and head of pensions at the Norton Rose law firm in London, believes that the Danner decision may encourage job mobility, "in the sense that a French employee who gets moved to Germany may still be able to pay into his French plan and get the appropriate tax relief." But Ford also argues that the case will make it more difficult to create one plan for the entire EU. He notes that the decision does not remove the differences among the various national tax systems within the EU, and he sees no movement toward tax harmony.

But Harold Lewis, pensions partner at Eversheds law firm in London, says the ruling has made the establishment of a pan-European pension "a distinct possibility" within three or four years. Lewis describes the judgment as "a kind of policy rejection of tax authorities trying to defend their own patch." (See "Is There a Pan-European Pension Ahead?," right.)

Alan Pickering, chairman of the European Federation for Retirement Provision, the umbrella organization for the European pensions industry, also takes a cautious view on the prospects for pension change within the EU. Pickering, who is a partner in the London office of Watson Wyatt Partners, an employee benefit consultancy, says public pension provisions among EU states will continue to be reflected in differences in pension arrangements within organizations.

Lewis does not expect the national tax authorities within the EU suddenly to crumble and remove all barriers to cross-border pension contributions based on the Danner case. Much more likely, he believes, will be a series of court challenges to existing tax rules, possibly resulting in a snowball effect. Lewis warns that nothing will happen overnight. He notes that it can take up to three years to get a decision from the ECJ. To get to the court, petitioners must first exhaust all legal remedies in their own countries.

Another potentially important pensions case is pending in the United Kingdom. AMS Management Systems, a consultancy, has asked the Inland Revenue, the U.K. tax authority, for permission to enroll a British employee in a Dutch pension scheme. AMS is being supported by a number of multinational companies. Eversheds is advising AMS.

Policy Adjustments

The amount of restructuring a large company will have to do to its pension program will depend on what it has done up to now, Lewis says. "My guess is that many multinationals have a patchwork of pension provisions, tailored to each particular country that the mobile worker happens to be working in for a year or two or three," he says.

These mosaics, Lewis says, should be relatively easy to dismantle and replace with schemes that would allow employees to be members in several states. Such arrangements would not be limited to people in the higher salary brackets, he says.