Attractions as a pension fund centre
In December 2000, auditors KPMG created a SEPCAV for the benefit of the managers and partners of KPMG in Luxembourg which will be managed and administered by Lombard International Assurance. A SEPCAV is a defined contribution funding arrangement designed by the Luxembourg regulators for use by international pension plans. Its particular features are described elsewhere in this publication.
One of the purposes of the KPMG /Lombard SEPCAV is to allow partners and other staff of KPMG in other countries to join the scheme. Earlier in 2000, Unilever created a Luxembourg ASSEP for the benefit of its internationally mobile employees. Therefore, the Luxembourg international pension vehicles are clearly “off to a good start”, but what are the long-term prospects for Luxembourg as a centre for international pension funds?
It is impossible to discuss the long-term prospects of the Luxembourg international pension vehicles without examining the context in Europe in which which they must operate. There are various barriers to the creation of cross-border pensions in Europe. Certain of these obstacles are in the process of being eliminated by European Monetary Union or are addressed by the directive proposed by the European Commission and European Parliament. However, these obstacles are not fatal to the prospects of creation of true pan-European pension funds or plans. The most serious obstacles are related to tax .
Various tax barriers affect the prospects of pan-European pensions in Europe. If one attempted to create a classic pan-European pension fund and plan centred in one European country for the benefit of employees in several countries, research has shown that one faces the prospect of multiple tax discrimination just considering the tax laws of the country in which the fund/plan is centred and the tax regime in one other EU member state containing members of the scheme.
Certain of these instances of tax discrimination concern the taxation of ‘benefits-in-kind’ flowing from the employers’ contributions to the plan. Others involve the tax treatment of pension fund investments,but the most serious discrimination emanates from the tax treatment of cross-border contributions. Typically, cross-border individual or corporate contributions to a pension /plan fund in another EU member state do not receive the same preferential tax treatment as contributions to an authorised domestic pension plan.
Initiatives are being taken by different bodies to alleviate the tax discrimination suffered by cross-border schemes. For example,the European Commission is considering introducing a directive addressing certain tax aspects of pensions. However, this directive is likely to cover only the tax problems of mobile workers leaving a pension plan in one country and joining a pension plan in another. A true pan-European plan enables employees to remain in one plan even if they work in different European countries.Furthermore, a European directive concerning matters of direct taxation requires the unanimous consent of all EU member states, which is extremely difficult to obtain.
Another initiative, sponsored by the Pan-European Pensions Group, involves challenging current tax discrimination in the European Court of Justice. A third initiative, sponsored by the European Federation for Retirement Provision (EFRP), is encouraging a select group of EU member states to create a European pension vehicle which is recognised by the few member states within the club.
Given the various efforts being undertaken to remove tax barriers, and taking into consideration likely timetables for challenges before the European Court of Justice and the progress of the European pensions directive, it is not realistic to expect an environment in which pensions can flourish before 2003. However, this does not mean that the Luxembourg international pension vehicles do not have an important role to play for certain plans.
While tax considerations are certainly very important when considering the possibility of placing all European employees of a multinational employer in one pan-European scheme,they are not nearly so important when considering other types of cross- border pension plan. For example, international plans for highly mobile international employees are more sensitive to other design features, such as the administrative convenience of placing all employees in one scheme.The long-term savings of placing all of one’s highly mobile executives in one plan, as opposed to continually transferring such employees in and out of plans around the world,usually outweighs certain disadvantages flowing from discriminatory tax treatment. Of course, if one can also obtain beneficial tax treatment for an international plan, then so much the better.
Other than the obvious advantage of being able to place all employees of a certain category in one scheme, the second attractive feature of the Luxembourg vehicles is that they do convey certain tax advantages. In most cases, the Grand Duchy of Luxembourg will not tax pension fund investment accumulations or retirement benefits (paid to Luxembourg residents) at the time of retirement. Furthermore, it is believed that use of an ASSEP will avoid certain discriminatory tax treatment of benefits-in-kind linked to employers’ contributions;this is because a member of an international pension plan funded through use of an ASSEP becomes a creditor of the scheme. In addition, there are other tax advantages, such as the fact that the Luxembourg vehicles were designed to obtain acceptance under double taxation treaties.
While it is clear that the Luxembourg vehicles hold attractions for pension plans for highly mobile employees, the second obvious immediate market for the Luxembourg vehicles are pension plans for the staff of Luxembourg branches/affiliates of international companies.
Use of one of the international vehicles allows for the possibility of employees or other staff employed outside of Luxembourg joining the pension scheme either in the near or distant future. The Lombard/KPMG pension scheme clearly falls into this category.
While the full potential of the international pension vehicles designed by the Luxembourg government will not be realised until the tax environment in Europe improves, there is certainly already a place for the schemes regarding certain types of international pension plan . By introducing its legislation at a relatively early stage in the evolution of European pension regulations, Luxembourg is giving itself every chance of developing into a pan-European pension “centre of excellence” in just the same way as its fund management and cross-border insurance industries have flourished and bloomed over the past few years.
Geoffrey Furlonger is director of pension services at Lombard International Assurance in Luxembourg and chairman of the Pan-European Pensions Group