The Luxembourg option
In 1999 the Luxembourg parliament adopted a new legal framework for pensions with the key aim of attracting international pension fund business. Two guiding principles employed were flexibility – allowing employers to use Luxembourg plans for as many different host countries (that is, where the expatriate lives and works) as possible – and security for the beneficiaries of the plan.
SEPCAVs and ASSEPs are quite different in their legal structure. A SEPCAV (Société d’Epargne à Capital Variable) operates more or less as an investment company where the employees are the shareholders, with the restriction that the shares cannot be sold prior to leaving service or retirement. The ASSEP (Association d’Epargne Pension) is an association and can be compared to the Anglo-Saxon trust or European non-profit- making organisation or even an insurance company. With an ASSEP the employees are creditors of the fund.
The differences between the vehicles are summarised in the table.
The common selling points of both structures are:
q They can accommodate employees from many countries (local pension laws need to be respected but the Luxembourg legislation allows a large degree of flexibility to adapt to differing requirements)
q The running of the plan is supervised by a single Luxembourg authority the CSSF (Commission de Surveillance du Secteur Financier)
q Luxembourg tax on investment return is virtually nil and both ASSEPs and SEPCAVs are eligible for double tax treaty relief on withholding tax on foreign investments.
This last point on tax of investment return merits further examination. The ASSEP and SEPCAV are classified as taxable entities. However, SEPCAVs benefit from tax exemption on income derived from, and on capital gains realised on, transferable securities. The ASSEP should bear no income tax in Luxembourg either since its liabilities will, in principle, match its assets. Since the vehicles are taxable, double taxation treaties can apply and so income on investments that would normally suffer a withholding tax could be increased by application of the treaties. In recent years, Luxembourg has considerably increased the number of double taxation treaties to around 40 including all EU countries (except Portugal), Switzerland and the US. It should be noted, however, that for this tax relief to be achieved, the ASSEP or SEPCAV needs to hold the investments directly and not through a third vehicle (such as Sicav).
Assuming the employer has decided to use a funded offshore pension plan (and as we shall see later there are many alternatives) how does Luxembourg stack up against other possible locations? Well, as all good consultants will respond – it depends. It depends on the location of the expatriates who are to join the plan. It depends on where they come from. It depends on how the employer wants to present the plan.
Criteria used to assess location include:
q Is there an adequate range of investment managers from which to choose?
q What investor protection is afforded to the beneficiaries?
q How stable is the tax and legal regime?
q How convenient is the location – proximity, language, time zone?
q Is the legal structure appropriate for the intended participants?
q What is the taxation of investment income?
q How does it feel to expatriates?
In general, the taxation of contributions in, and benefits out, of the plan purely depend on the individual expatriate’s tax status at the time. However, one particular point deserves special attention and that is the situation for expatriates in the UK. It is possible to obtain ‘corresponding acceptance’ from the UK Inland Revenue to an offshore plan provided certain conditions are met. One of those conditions is that the sponsoring company/group must have an operating presence in the country where the plan is established. Hence, location can have a significant impact for this particular aspect.
The points that influence Luxembourg’s rating include:
q There is a wide selection of providers (investment managers, administrators, custodians, banks) operating in Luxembourg.
q It is in the EU and so can reinforce a company’s attempt to portray itself as a good EU corporation.
q Being in the EU means it will not suffer from any EU legislation that discriminates against non-EU companies.
q The tax and legal regime in Luxembourg is generally considered to be very stable (unlike other countries which are constantly introducing new pensions legislation that “interferes” with the operation of pension plans).
q The legal structure is designed in part to protect the interests of the members and so presentation to the members can be attractive in terms of security.
q Europeans do not view Luxembourg as ‘exotic’.
Some of these points can work either for or against Luxembourg. For example on the last point, US citizens may well take a different view of how exotic Luxembourg sounds compared with, say, Bermuda.
In recent surveys carried out by PricewaterhouseCoopers on International Assignments, European Policy and Practice the traditional expatriate was reported to be “alive and well” but the number of non-standard assignments is growing strongly. Organisations are seeking alternatives to harness knowledge on a global basis, build multicultural, multinational structures and address growing barriers to mobility.
q Commuter assignments Employee commutes from the home country usually on a weekly or bi-weekly basis;
q Contract assignments Often used for international projects of limited duration;
q Rotational assignments For example, an oil rig worker who works four weeks on, four weeks off;
q Virtual assignments Relocation is replaced by frequent business trips and heavy reliance on communications.
Just as careful consideration of assignment type is critical to the success of the assignment so is the choice of pension approach to match the needs of the expatriate and employer.
The main options available are:
q Keep the expatriate in his or her home pension plan;
q Put the expatriate in the plan (if any) of each host country;
q Set up an offshore pension plan;
q Provide an umbrella promise (funded or unfunded, defined benefit or defined contribution) to “make whole” the expatriate’s overall pension entitlement;
q Pay extra cash (eg, as part of an end-of-assignment bonus) in lieu of pension
Clearly for a population of expatriates of various assignment types no single solution fits all. But in addition, no single set of criteria can be used to assess the most appropriate approach for all expatriate groupings. For one group, tax optimisation may be the most important factor (and is often assumed to be without properly thinking through the consequences) whereas for another group flexibility in terms of currency and benefit may be key issues.
The Luxembourg vehicles are by no means a magic solution but add to the options available for providing for expatriate pensions.
David Pettitt is senior manager in actuarial benefits and insurance at PricewaterhouseCoopers in London