Brans Brief number 6, year 9, June 2006

In this issue of the Brans Brief:
 

	New step in European fiscal processing of pensions?
	Assessment of Multiemployer Pension Funds (Obligatory Participation) Act 2000 Exemption Decree
	Changes to schemes for pensions, disability and medical expenses: How is ‘the market’ behaving?

New step in European fiscal processing of pensions?

On 1 June 2006, the Advocate General at the European Court of Justice issued his opinion in a case between the European Commission and Denmark concerning the fiscal processing of pensions (case C-150/04). Following the Bachmann, Danner and Skandia cases, the Advocate General’s opinion in this case appears to represent the next step in the settlement of tax barriers for cross-border services in respect of pensions.

Under Danish tax law, there are various different regimes for pension schemes, based on whether or not they are administered by Danish providers. Providers resident in Denmark are subject to a significantly more favourable system for deductibility of pension premiums paid. The Advocate General concluded that this situation wrongfully deprives Danish policyholders of possibilities to take out pension policies with providers established outside Denmark.

The Danish government argued, with reference to the Bachmann case, that the system used is permitted on the grounds that it safeguards the cohesion of the Danish tax system. The AG disagreed with this argument, stating that the Danish tax regulations result in discrimination of insurers whose registered office is not in Denmark. Moreover, the AG held that no valid justification had been put forward. Neither the cohesion of the Danish tax system nor the necessary effectiveness of the fiscal controls constituted sufficient grounds. As such, the AG concluded that reliance on the public interest was also unjustified.

If the European Court adopts this opinion, Denmark will have to open its pension market for foreign providers. However, the effects of such a judgment will be felt far beyond the Danish borders.

For more information contact: Rick Crauwels.

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Assessment of Multiemployer Pension Funds (Obligatory Participation) Act 2000 Exemption Decree

The Minister of Social Affairs and Employment recently gave instructions to analyse the experiences of employers, employees and pension administrators with the Exemption Decree. The period covered by this study was 2000-2004. During this period, a total of almost 700 applications for exemptions were submitted to the multiemployer pension funds examined. Two thirds of those applications were based on the obligatory grounds for exemption, and one third on ‘other reasons’ (non-obligatory).

The results of the assessment show the following:

• Of the 63 funds examined, employees of 47 were registered as exempt.
• The proportion of exempt employees per fund ranged between 0.1% and 6.5%.
• No clear trend could be distinguished with regard to the numbers of exempt employees. However, a movement was evident from non-obligatory to obligatory exemptions.
• Approximately 50% of the applications submitted resulted in exemptions.
• One third of the exemption applications were rejected. The principal grounds for rejection were disparate pension schemes and exemption applications for individual employees.
• More than 15% of the applications were withdrawn before a decision had been issued. The principal reason for that was that own retirement provisions proved to be lacking.

The table below shows what grounds for exemption were invoked:

Grounds for exemption	Applications submitted	Exemptions granted	Funds involved
Existing retirement provision	357	208	20
Group formation	55	122	8
Own collective bargaining agreement	10	12	5
Insufficient investment yield	11	Not yet available	2
Other reasons (non-obligatory)	197	224	13

The main cause for the difference between the exemption applications and the exemptions granted, and for the differences in the totals, lies in the manner in which the data is registered. For example, an exemption application on the grounds of group formation is generally registered as a single application, while the exemptions granted are registered separately.

The reasons why a relatively large number of exemption applications on the grounds of existing retirement pension were not granted stem from the following situations:

• the lack of supposed retirement provisions;
• the applying party does not fall within the scope of the fund;
• the application pertains to an individual employee.

The exemption applications based on insufficient investment yield have not yet been processed. In most cases, the procedure for such applications is time-consuming.

The number of non-obligatory exemptions granted for ‘other reasons’ is higher than the number of applications submitted, because funds also grant exemption if the applying party does not meet all the conditions for obligatory exemption.

Based on this assessment, the Minister has concluded that the information provision to employers should improve. The funds themselves will be responsible for this. Finally, the assessment offers no grounds to amend the Exemption Decree.

For more information contact: Kees den Blanken.

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Changes to schemes for pensions, disability and medical expenses: How is ‘the market’ behaving?

In April/May, Watson Wyatt carried out a short study into changes to some important employment conditions. With the introduction of new laws and regulations, businesses have been forced to change their schemes for early retirement/pre-pension, disability and medical expenses. In most cases these changes have been far-reaching and were implemented simultaneously, without any current market information being available. In total, 114 businesses took part in the study. The most important findings are set out below.

Pension and lifecycle savings

• Most of the businesses taking part in the study (83%) made arrangements before 1 January 2006 to adjust their pension schemes to meet the requirements of the Early Retirement, Pre-Pension and Lifecycle Savings Scheme Act. The pension schemes of almost half the businesses distinguish between over-55s and under-55s. In virtually all cases the new retirement age has been pushed back to 65.
• The accrual percentages of many businesses (73%) have increased while deductibles have been lowered (at 59% of the businesses).

  	2005	2006
  Accrual percentage	1,9%	2%
  Deductiblee	€13.946	€13.143

• This appears to indicate that the abolition of pre-pension is compensated by increasing the accrual of old-age pensions starting at 65. After all, the accrual percentage – being the amount saved toward one’s pension every year – rose during 2006. The deductible, that is the part of one’s salary on which nothing is saved toward one’s pension, has dropped. This allows employees to build up more pension rights so that they can still retire before the age of 65.
• A clear majority (77%) do not contribute toward the lifecycle savings scheme. Of the businesses that do provide employer contributions, the average contribution to the lifecycle savings scheme is 2.7% of the employee’s base annual salary.

Disability

• Approximately two thirds of the businesses grant disability benefits to disabled employees, in addition to the new Work and Income (Capacity for Work) Act (‘WIA’), based on the parts of the salary both above and below the maximum wages for WIA purposes. A striking finding in this connection is that 29% of the businesses that offer cover below the maximum wages for WIA purposes (called the cover for the WGA gap, i.e. the gap under the Regulations on Work Resumption (Partial Disability), or ‘WGA’) currently do so by way of their pension funds. The Dutch Central Bank has adopted the position that pension funds may not offer formal cover for the WGA gap. For more information on this matter, please refer to the previous issue of Brans Brief.
• Pension right build-ups at by far the majority of businesses (87%) continue to be based on the employee’s full salary prior to the first day of sick leave.

Medical insurance

• Almost all the businesses taking part in the study offer their employees a collective medical contract, with over half the businesses allowing pension beneficiaries to participate.
• Almost half the businesses contribute to one or more additional medical insurance policies. At 64% of the businesses, this contribution averages € 99 per year. The remaining 36% pay on average 55% of the insurance policy.

The full report on the findings from this study is available online.

For more information contact: Monique Driessen.

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