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Monday, July 01, 2013 10:50:09 AM

Pension savings most at risk from FTT – The TRADE Poll

Higher investment costs for pension savers is seen as the most likely outcome of the pan-European financial transaction tax (FTT), according to readers of thetradenews.com.

The tax on financial transactions, set to be 0.1% for equities and 0.01% for derivatives, is designed to raise money to fund future bank bailouts and eat into the profits of banks, but many think the effects will hit end-investors hardest. As currently drafted, the tax would apply to any trade within the 11 countries which are supporting it, regardless of where the transacting institutions are based.

Almost 38% of those polled said that higher costs for pension funds was the most likely consequence, while 34% believe the states supporting the tax will need to back down on their proposals.

The potential for the FTT to increase investment costs for pensioners has been one of the major criticisms of the Europe-wide FTT since its inception. With many European countries already facing a pensions crisis due to increased longevity, there are fears that introducing a tax on trades would hurt pension savings at a time when national governments are attempting to encourage more people to save for retirement.

James Walsh, EU & International policy lead at the UK's National Association of Pension Funds, agrees that the potential impact on pension funds is one of the most damaging aspects of the tax, but is hopeful that politicians can force change.

"In the UK, politicians are well aware of how this would damage pension provision and are fighting hard in Europe to have the tax dropped, or pension funds exempted," he said.

Walsh does not however expect the 11 states that support the tax will completely back down on the proposals.

"The original deadline for implementing this at the beginning of 2014 is not going to happen and I think it will be a long time before the tax is introduced, which gives time to lobby politicians and get the proposals watered down a bit," he adds.

Repo threatened

The repo market is also threatened by the FTT, though it took a backseat to other expectations in thetradenews.com poll, with 16.5% of respondents citing its collapse as the most likely outcome of the tax.

Jean-Robert Wilkin, head of product management, Global Securities Financing at central securities depository Clearstream, said: "Regardless of what level this transaction tax ends up being set at, it will be very tough on the repo market because a large number of the transactions we see today will simply be uneconomical.

This will have a dramatic impact on liquidity and it will ultimately hit the end investor as the extra costs will be handed on to clients."

A smaller number of respondents, 11.5%, thought the FTT could hasten the UK's possible exit from the EU. UK Prime Minister David Cameron has promised a referendum on the issue and the government has been a fierce opponent of the tax, which could adversely impact the City of London due to its extraterritorial nature.

There may be some hope on the horizon however, with sources close to the FTT discussions recently suggesting the tax could be cut to just a tenth of the initial proposal, at 0.01% for equities and 0.001% for derivatives. An exemption for pension funds has also been mooted, though it is unclear how the tax would be applied to money managed by third parties on behalf of pension savers.

Currently, discussion on the tax is on hold while Lithuania, which is not one of the countries supporting the tax, takes up the revolving European presidency from today. Greece will take over the presidency in January and is expected to push forward on FTT implementation.