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Q13: Would the introduction of a standardised product, or removing the existing obstacles to
cross-border access, strengthen the single market in pension provision?
The UK does not believe that moves to introduce a standardised product would have a significant
impact on creating a single market in pension provision and has seen little evidence of demand for
cross-border products. We would also question whether the introduction of a standardised product
would meet the objectives of CMU: improving access to financing for all businesses; increasing and
diversifying the sources of funding from investors in the EU and from across the world; or making
markets work more effectively and efficiently.
Consumers already have a wide choice of pension products across a broad range of providers. These
providers can also operate across member states through the establishment of branches that adhere
to local regulation and tax rules. The UK has not seen any barriers to the establishment of crossborder firms nor does the UK believe that products based on a 29th regime would materially increase
consumer choice in a useful way or the uptake of pensions.
Fiscal incentives form a key part of pension products, often receiving generous tax relief. In the UK
this takes the form of tax relief on contributions and tax efficient growth, with favourable tax
treatment at the decumulation phase. In order to be compete with existing products any 29th regime
would need offer similar incentives and comply with local tax laws. Since tax laws are not
harmonised amongst Member States, pensions sold under this new regime would different in every
Member State. This effectively creates a second regime for operation in every Member State, in fact
creating 56 separate regimes. Not only would this create additional burdens for providers, but it
would also increase costs and complexity for supervisors.
Furthermore it would be difficult to create a simple way for such pensions to be ported cross border.
Different tax treatments open up possible avenues for tax evasion and the robust rules which would
be required to prevent abuse would also likely increase complexity for savers seeking to move their
pension to another Member State. Similarly, to prevent savers simply opting for the jurisdiction with
the most generous relief, they would be required to set up the pension in the Member State in
which they paid tax, further undermining the possibility for cross border trade.
There are also important investor protection considerations. In our experience, pensions tend to be
one of the more complex financial products for retail investors. Moreover, pensions represent a
potentially once in a lifetime decision about saving for retirement. Reflecting these complexities and
specific investor protection risks and the UK has developed a bespoke regime, particularly as regards
disclosure, tailored to the specificities of our market. This complexity and the need to recognise
national specificities in pension provision has been recognised in the PRIIPs Regulation. Introducing a
second regime would dramatically increase complexity for investors and inevitably lead to significant
consumer detriment. It would also likely lead to “regime shopping”, with providers opting for the
least onerous regime, possibly leaving consumers unprotected.
It is therefore difficult to justify how a 29th Regime could conform with the principles of subsidiarity
or proportionality or, with costs likely to significantly outweigh benefits, pass an impact assessment.
We therefore strongly suggest that this idea is not progressed through CMU.
The UK does however agree that the small size of EU pension funds limits the funds available in the
EU capital markets. As noted in the Staff Working Document (SWD) accompanying the Green Paper,
the size of US pension funds were important to the development of the US capital market. The SWD
also notes that further development of pension schemes in the EU would have a positive impact on
the size of EU capital markets. Empirical evidence shows that there is a significant positive
relationship between the size of pension funds and capital market depth. Further, the SWD
acknowledges that a safer and more efficient occupational pension market would be welcome in
Europe, particularly as some Member States are underdeveloped in this area, for occupational
pensions could then better fulfil their natural role as major institutional investors in European capital
markets.
Action taken in the UK to address the needs of our aging population has had the complementary
effect of bolstering the size of pension funds. While we do not believe that such policies could or
should be established at European level, in the spirit of sharing best practice we have outlined the
UK’s Auto Enrolment policy which may be of use to other Member States wishing to address
structural issues with the pension savings rates in their own jurisdictions with the added benefit of
contributing to the development of the depth of the EU’s capital market.
Auto enrolment for workplace pensions was introduced in the UK through legislation (2008, 2012) to
enable eligible employees to save effectively for their retirement. Millions of workers in the UK
were not saving enough for retirement. This, combined with UK citizens living longer, meant
pension shortfalls were becoming a real problem and a great concern for government. Auto
Enrolment was introduced as a way to try and combat this. The problem can be seen in the long
term decline in the number of open private section defined benefit schemes (from a peak of c. 8
million active members in 1969 to 2.4 million active members in 2010). Defined contribution
provision was expanding, but not fast enough to offset the decline. By 2010 only one third of private
sector employees were saving in any form of pension, leaving 7 million workers not saving enough to
meet their retirement aspirations. Following legislation, employers are required to auto enrol
eligible employees (criteria are: ordinarily working in Great Britain; aged between 22 and State
Pension age; and earning greater than £9,440 in total gross pay, in 2013/14 earnings terms
[Department of Work and Pensions]), who can then opt out if they wish; in the UK there are
between 9-10 million eligible workers.
It is still a relatively young initiative but based on data available so far seems to be successful. A
recent study carried out by the Department for Work and Pensions showed that the average opt out
rate across all the public and private sector employers in the study was just 9%. Most individual
employers had an opt-out rate ranging between 5% and 15% of automatically enrolled workers.
Across the 42 employers providing detailed data, it is estimated that overall participation in a
workplace pension increased from 61 per cent to 83 per cent (from around 1.2 million workers to 1.6
million workers). The amount of money in UK funded pensions in 2010 was £2,120 billion (147% of
GDP). Between 2012 and 2013 11.7 million employees were auto-enrolled and the total amount
saved annually increased by £4.3 billion to £77.6 billion.