PM+: Costs of FTT 'ultimately borne' by pensions

If plans go ahead, pensions must be 'exempt from application' of financial transaction tax, argues Matti Leppälä.

By Matti Leppälä

12 May 2014

In its current form, the financial transaction tax (FTT) would tax transactions of all different types of financial institutions, regardless of their social function, role in the financial crisis and nature of their investments - i.e. short-term or speculative investments versus long-term investments.

More than five years have passed since the beginning of the financial crisis and European citizens continue to suffer the consequences of a crisis that never seems to end. In the meantime, European legislators have engaged in an in-depth review of the financial sector which, to be fair, was needed.

The FTT is one of the several regulatory initiatives that European legislators have undertaken in the wake of the crisis. The FTT ultimately aims to make the financial sector pay for the crisis that they allegedly caused. This objective, which is certainly legitimate, will not be achieved if the current design of the FTT is not carefully reviewed.

Indeed, the current FTT legislative proposal does not realistically assess which institutions (and persons) will eventually end up paying for the tax. Moreover, the FTT would tax the financial transactions of all the different types of financial institutions, without taking into account their social function or their role in the financial crisis. Additionally, it does not differentiate between short-term speculative investors and long-term investors. We believe that this is a mistake.

"There are fundamental differences between pension funds and other financial institutions that justify an exemption for pension funds from the FTT"

There are fundamental differences between pension funds and other financial institutions that justify an exemption for pension funds from the FTT (which currently is not the case). In the first place, pension funds are not short-term speculative investors, but long-term investors which invest in assets matching their long-term liabilities.

Moreover, pension funds did not require any support in terms of funding from public finances during the crisis. They actually contributed to water down the crisis by keeping their long-term liabilities in the financial markets. Finally, and more importantly, pension funds fulfil an important social function: they are generally not-for-profit institutions which contribute to ensure that European citizens have an adequate retirement income. In times when public pension systems are increasingly confronted with strong economic and demographic constrains, private funded pensions should be promoted and not the opposite.

It should be borne in mind that pension funds (and their beneficiaries) will suffer from the FTT even if they were finally granted an exemption. It is largely expected that the sell-side and intermediate financial institutions taxed by the FTT will eventually pass their share of the tax to their customers. Pension funds, as institutional investors, are customers (buy-side) in the financial markets and we therefore fear that, as it is the case with other taxes, the final customer will end up paying for it.

The consequent increase of costs that the FTT will bring will ultimately be borne by the pension beneficiaries in terms of higher contributions or reduced benefits. There is no cause to ask European pension beneficiaries to pay for the crisis. They did not cause it, but rather they have suffered a lot from it.

For the above reasons, PensionsEurope invites the 11 participating member states to dismiss the proposal. However, should the tax be introduced, then pension funds and their assets should be exempted from its application in order to reduce the burden for European pensioners.

Share this page