Home ListingJune 14, 2013

Governments under Fire for Damaging Workplace Pensions

<em>PensionsEurope survey criticises tinkering with tax and investment policies, which results in poorer pension provision.</em>

Reported by Featured Author

(June 14, 2013) – Policy interventions by European governments on taxation and investment rules are threatening the sustainability of member states’ pension provision, PensionsEurope has warned.

The lobbying group, responsible for promoting the development of occupational pensions, said many national governments’ attempts to consider pensions as a source of capital that can be used to adjust fiscal imbalances is damaging the pensions sector.

Particularly of concern is the potential proposal to move occupational pension assets-also known as second pillar assets-into the state budget, as is being proposed in Poland.

Other short-term fixes which could have major impacts on pension saving, and therefore the assets going into the pension sector, are the increase of tax rate applied to occupational benefits, the increase of tax rate on pension contributions, decreases in the amount that can be saved tax-free, and the introduction of lump-sum taxation.

Several examples were highlighted by PensionsEurope’s report, including:

1) France was criticized for continually increasing taxation on pension contributions-the forfeit social-which was raised from 2% in 2007 to 20% in July 2012.

2) In Spain, the rate of taxation has been increased to cover all earned incomes, including benefits from private pensions.

3) In Austria, due to the rescue of large bank Hypo Group Alpe Adria, the government decided to enact a law which provided a one-time option of retired participants and those near retirement to tax their whole funds with a flat rate of 20% or 25%.

4) In Ireland, a temporary annual levy of 0.6% has been imposed on pension assets. It was introduced in 2011 and due to remain in place until 2014.

5) In the UK, the reduction in Lifetime Allowance (the amount of benefits which can be saved into a pension tax-free over a lifetime) has been reduced from the current £1.5 million to £1.25 million in 2014-15. The UK also saw its Annual Allowance (the amount of benefits which can be saved into a pension tax-free over a year) drop from £255,000 to £50,000 from April 2011.

Matti Leppälä, chief executive of PensionsEurope, said: “Effective pensions policies have to be for the long run. If governments tamper with workplace pensions, people will rightly lose trust in them. And if drastic measures, such as nationalisation of pension funds are used, it will take decades to build them up again.

“People in Europe need good pensions and that will not happen without good workplace pensions”.

The full report, and more daunting examples of governments moving the taxation and investment rules goal posts, can be found in the PensionsEurope Survey on National Policy Actions paper.