Alliance puts SEPCAVs on map
Unilever’s foray into the Luxembourg pension fund market was highly publicised last June when it launched the country’s first ASSEP. A far better-kept secret was the country’s first SEPCAV, launched three months later by consultant Barnett Waddingham on behalf of Alliance, the Dubai-based insurance company. That Alliance has embraced the SEPCAV scheme was fortuitous rather than by design. Nevertheless, the structure and flexibility of the Luxembourg vehicle makes it an ideal pensions provider for, among other things, countries with little or no pensions legislation.
Middle Eastern countries like Saudi Arabia, Kuwait, Qatar and the United Arab Emirates (UAE), often have an expatriate population outnumbering local residents- in Saudi, for example, 8m of the 15m living there are expats, as are two out of three in the UAE. Now, for nationals employed by the government, there’s an existing defined benefit scheme. For privately-employed nationals, there was no provision until June 1998 when the UAE government decided to set up a central fund.
Ikram Shakir, managing director of the Luxembourg office of consultants Barnett Waddingham, takes up the story on behalf of Alliance: “We took the view that, as the government had done something for the nationals, it would most probably do something for the expats.” At the time, ASSEPS and SEPCAVS were being hatched but had yet to be ratified by the parliament. Barnett Waddingham was monitoring the progress of Luxembourg’s first pension fund vehicles whose launch eventually proved a blessing.
Says Shakir: “Initially we thought we could set up a vehicle similar to a trust fund in the UK under which the employer can set up pension arrangements for its employees. But when we looked at the legislation we found there was no such thing as a trust. A trust provides the security for the benefit of the employee if the employer gets into financial difficulty. So the employees benefit could not be safeguarded.
“We then looked at other vehicles like investment companies but they were very expensive to set up. And then, to our luck, in June 1999, Luxembourg launched the ASSEP and SEPCAV vehicles which safeguard the employees rights.” Luxembourg’s new vehicles fitted the bill as they were efficient and provided security for the members. Shakir figured they could construct a multi-compartment fund where each one could be offered to individual employers in the UAE.
And so the Alliance Pension Fund (APF) was born. Barnett Waddingham and Alliance deliberately opted for a SEPCAV as it is a defined contribution system; ASSEPs are predominantly defined benefit but technically can be either. APF is a multi-compartment fund offering what Shakir describes as a ‘rent-a-compartment’ service for UAE employers.
Shakir says the appeal of the fund is twofold. First, its flexibility. Employers have full control over the compartment, the design of the benefit, the asset allocation and whether to have a multi manager compartment. “In addition you can have more than one compartment for the same employer where each one is like a life style,” he says.
Secondly, its simplicity. If the employer decides to join the scheme, all it has to do is write a cheque. “You don’t have to set the fund up, you don’t have to administrate it, you don’t have to control anything. We do everything, it comes as a package. The fund is set up already…there is a custodian already appointed and there is a list of fund managers from which to choose,” says Shakir.
Employers can set contributions and benefits and, by and large, the fund is an empty shell, a framework there for customising. Luxembourg’s CSSF regulates the fund, Banque Générale de Luxembourg is the official custodian and Barnett Waddingham has appointed an independent auditor. “The employer has to come in and say ‘I want a compartment’, set up the benefit level, select the fund manager and off he goes. With a signature on a single piece of paper, he can start the whole process,” says Shakir.
Launched only five months ago, it’s no surprise the fund remains empty but Shakir has recently returned from a roadshow in the Middle East where he pitched to 150 prospective clients. They are now talking to about a dozen Multinationals, including the UAE’s largest employer. Alliance’s chairman also chairs Emirates Airline so there’s hope the company will be in the vanguard along with Alliance, itself setting a good example and taking a compartment for its employees.
Five year projections set a target of between $75-100m in assets, two clients in the first year with one quarterly thereafter. Shakir is keen to stress the UAE’s population is only one and a half million- next door are even greater riches in the form of Saudi Arabia with a population of 15m. “Alliance has a product in hand and they will be moving into Saudi Arabia as well,” he says.
In addition, when Shakir elaborates on the region’s labour laws the projections seem extremely realistic. Employers in the UAE and Saudi Arabia are required to pay retiring employees a month’s final salary for every year served with the company and few employers have bothered with any kind of provision.
“Not many companies are aware they have to fund for this, they take it out in cash and pay it,” he says. “We are approaching the employers saying ‘this is your liability, you will have problems paying it out of the cash flow and if you go bust your employees are uncovered.’” To cover this liability, employers can simply take out another compartment in the fund.
Shakir and his team have also earmarked eastern Europe as fertile ground for ASSEPS and SEPCAVS. Until now the state has provided pensions and in the private sector there is absolutely no provision. A lack of legislation in the region means the Luxembourg vehicles are ideally equipped to fill the gap. At the moment Barnet Waddingham is preoccupied with the Middle East but Shakir is confident Eastern Europe is a market in waiting.
Talking to Shakir is talking to a man who believes in his product, a man with conviction. Referring to countries with funded sytems- the UK, the Netherlands and Ireland- people are apparently talking about a figure approaching E10-12trn over the next fifteen years. Says Shakir with a characteristic smile: “we are very bullish about this market.”