07 February 2012

EFRP warns against unexpected effects of FTT

The European Federation for Retirement Provision (EFRP) stresses that if the Proposal was approved in its current form, pension funds, IORPs and companies managing assets on their behalf would be deeply affected by this tax. The consequent increase of costs would be born by beneficiaries, in terms of reduced benefits: current and future pensioners would be requested to pay even more the costs of this financial crisis, which has already affected their income. The EFRP invites the European Parliament and the Council of the European Union to dismiss the Proposal. However, should this tax be introduced, pension funds, IORPs and financial institutions managing assets on their behalf should be exempted from its application.

The European Parliament and the Council of the European Union are currently in the process of discussing a Proposal from the European Commission for a Directive on a common system of financial transaction tax (FTT). The Proposal sets a common tax on all transactions, carried out by financial institutions based in the European Union. So far, only the Czech Republic, Denmark, Ireland, Malta, Sweden and the United Kingdom have expressed their opposition to the Proposal. The EFRP questions the impact of such a tax. EFRP is openly in favour of a fair contribution from the financial sector to the stability of public finances and to the overall economy in the European Union. However, it believes this tax would disproportionately impact pension funds and IORPs. Financial transactions would be made more expensive; therefore, net returns would be lower, the investment strategy may turn to be less efficient, less liquidity would be circulating on the market.

As a matter of fact, higher costs, lower returns and less efficient investment strategy for pension funds, IORPs and companies managing assets on their behalf would determine lower benefits for pensioners. The EFRP recalls that pension funds and IORPs fulfil a social function and they are not speculating investors. Moreover, as acknowledged by the European Commission itself, pension funds and IORPs did not experience the same problems as other financial institutions nor benefited from any support in terms of public funding during the crisis.

EFRP stresses that the FTT would have unexpected effects: it would multiply the actual tax rate paid by pension funds and IORPs; it would apply to financial transactions which are part of a long-term strategy in the same way as to risky transaction carried out by other financial actors; it would dissuade non-EU investors, when deciding whether to enter into a transaction with an EU-based pension fund, IORP or any financial institution.

EFRP highlights that this tax would not target any of the key attributes that increase systemic risk, nor would it address major market failures which led to the financial crisis. Rather, it would reduce market liquidity and this could increase market volatility. Moreover, the proposed FTT would increase the risks of market distortion through relocation of financial transactions outside the FTT covered area and of tax avoidance through fiscal engineering.

Full position paper

© EFRP - European Federation for Retirement Provision