The EU hopes its much-hyped portable private pension will address a dangerous shortfall in retirement savings. But as demographic issues differ between member states, experts question why Brussels is taking the lead.
Just before EU institutions broke up for the summer, the European Commission (EC) announced wide-ranging proposals for a Pan-European Personal Pension (PEPP) to boost old age savings. The voluntary scheme will allow some 240 million working age adults to contribute to private savings accounts that will be fully portable if they choose work in other EU states.
PEPP is meant to supplement the state pension provision as well as retirement schemes offered by employers. With the likes of Germany, Britain, Spain and Greece facing huge deficits in their private and public pension schemes, Brussels believes the proposals will help plug the retirement gap and at the same time, create a bigger market for financial services providers to operate.
Last year, accountancy firm Deloitte estimated some 2 trillion euros ($2.4 trillion) per year is needed to address the pensions savings shortfall across Europe, which is unlikely to come from individual member states. It warned that Ireland and Spain had seen the biggest increase in the pension savings gap over the previous six years, and that Germany was the largest at 461 billion euros. The Deloitte research was commissioned by insurance giant Aviva.
Can Brussels really boost retirement savings?
As Europe returns to work and gets a chance to digest the plans for PEPP, some academics are skeptical about whether the proposals will offer better returns for workers and if the new pension products will increase the overall level of retirement savings, which is one of Europe's most pressing concerns.
"It looks like a solution looking for a problem, rather than a game changer," said Paul J Sweeting, from the Center for Actuarial Science, Risk and Investment, at Britain's University of Kent.
Sweeting would rather see individual EU states respond to the so-called pension time bomb, a term used to describe huge demographic imbalances and savings deficits that could see future retirees retire with much smaller monthly pensions than they were promised.
But the European Commission (EC) insists PEPP will be tailored to the vastly different needs of EU member states, and will offer the flexibility that today's mobile workers are looking for.
By 2060 there will be just two workers paying taxes to support each European pensioner compared to four for every retiree in 2013, according to data from Insurance Europe, the continent's federation of insurance providers.
More choice for consumers
EC spokeswoman for Financial Services, Taxation and Customs, Vanessa Mock, told DW that PEPP will "open up the personal pension market to a broader range of providers all over Europe" and give consumers "better contractual conditions" and the ability "to switch providers and investment options on a regular basis."
Short-termism in national politics is more of a concern for Hans van Meerten, a professor of international pensions law from the University of Utrecht, which he blames for preventing individual EU states from making much needed pension reforms. While EU members are hesitant to hike retirement ages further and deal with hundreds of billions of euros in pension scheme deficits, he hopes PEPP will allow consumers to be more accountable for their own retirement plans.
"I don't have confidence that national governments will solve the pensions issue," he told DW, adding that his major concern is that young people are not saving enough and cannot not rely on state pensions as much as the baby boomer generation does.
While most analysts fixate on the severe pension deficits in western Europe, van Meerten thinks PEPP could prove popular in central and eastern EU states.
Workplace pensions are less common in eastern Europe, where retirees rely solely on the state pension system and are often forced to earn an extra income in the shadow economy.
Tax mistakes could be costly
The EC has tried to eliminate all cross-border obstacles to ease PEPP's path. But one barrier they have yet to overcome is how the new pensions will be taxed. Although premiums and the accrual of interest are exempt from tax in most countries, pension withdrawal is taxed at vastly different rates across the bloc, which could cost PEPP customers dear if they move to the wrong EU country.
"Let's say you've accrued 100,000 euros in the Netherlands and you move to Belgium, you would get taxed at whatever the Belgians charge rather than the Dutch, which could be much higher," van Meerten told DW.
Sweeting agreed that a lack of consistency in tax treatment may hamper PEPP's popularity, and predicted that a single tax, pensions and savings framework across the continent would "probably take a generation to achieve."
Although the Commission insists that local tax authorities will be able to "grant preferential tax treatment" to PEPP plans, groups representing retail investors are concerned that individual states may discriminate against products under the EU scheme.
"There is the 'not invented here syndrome,' where EU member states — sometimes because of the lobbying of industry or economic policy — discriminate against EU products versus national products. We don't want to see them levying additional taxes or not allowing a certain pension product to be available to a certain consumer," said Alex Rodriguez Toscano, Policy Officer of the Brussels-based Better Finance.
Adequate savings protection
Concerns about tax treatment are dwarfed by worries that consumers may struggle to be compensated if their pension provider, who may be located in another part of the EU, goes bankrupt. The European Commission has insisted that PEPP schemes would provide several avenues for redress, including the EU's online Alternative Dispute Resolution procedure (ADR), which would allow cross-border disputes between providers and consumers to be settled easily.
Better Finance, which campaigned for years for the creation of EU wide retirement products, is pushing PEPP providers to offer still greater protection. It wants to ensure the scheme's low-risk default saving option will give real rather than nominal long-term capital protection.
"We want capital protection which takes inflation into consideration," said Toscano. Otherwise PEPP runs the risk of "creating a monetary illusion, where people think they're going to receive more money than they actually get."