Balance of advantages
Luxembourg’s new pensions vehicles, the ASSEP and the SEPCAV have put the country head to head with other traditional offshore centres like Jersey and Guernsey. At face value it might appear the new schemes are more of the same and, in many respects, there is little between the markets. On closer inspection though, there are differences between the jurisdictions that any savvy promoter establishing a pension fund in either would be wise to investigate.
First, the time needed to implement an international pension fund (IPF) in Luxembourg is anywhere between two and four months. In both Guernsey and Jersey there is no specific deadline but it seems the process can be executed quicker. The advantage here can go either way- the decision to create an IPF takes a while, so an extra couple of months is immaterial. Alternatively, institutions often like to implement such schemes before a specific dates, by the end of a financial year, for example. So, one-all for Luxembourg and the Channel Islands.
Secondly, Luxembourg requires government approval, Jersey does not. An optional approval can be required in Jersey and this approval gives a greater feeling of security to those using the schemes. Both Guernsey and Jersey have installed Trust companies (pension foundations) whereas Luxembourg has installed Corporate bodies and this makes a significant difference. If the promoter goes bankrupt, Luxembourg’s set-up looks more secure for the affiliates.
Taxation of company contributions depends on the employee’s country of residence and this is another extremely important issue. Double tax treaties between the plan’s country and the countries investing in the scheme can, due to the long term nature of supplementary pension schemes, save the promoter a lot of money. Luxembourg has had dozens of double tax treaties with other countries for years, something that is lacking in Guernsey and Jersey (with the exception of the UK, that is.)
Tax deductibility for company contributions depends on the location of the company and on local tax rules. In the future though, the fact that Luxembourg is part of the European Union may well have an impact on deductions for EU companies if there is EU harmonisation or co-ordination.
Amendments to the plan can be executed very easily in the Channel Islands by a simple company decision but in Luxembourg they are subject to approval by the supervisory authority. This makes the schemes in Guernsey and Jersey more flexible whereas Luxembourg appears more concerned with the members and their security.
For Jersey and Guernsey, recovering excess contributions is not an issue while, in Luxembourg, authorities allow a little flexibility. Once again, Luxembourg opts for greater security whereas the Channel Islands enable more flexibility. Similarly, Luxembourg has taken steps concerning protection against bankruptcy while in Jersey this appears to have been overlooked.
Also important is the lack of investment restrictions in Jersey and Guernsey. In Luxembourg this issue is open to debate in that all that is required is investment be ‘diversified’. Finally, actuarial assumptions are flexible in Luxembourg with the liability manager being accountable; in Jersey they are not mandatory.
Despite these differences, there are many similarities. Potential benefit structures are the same in each country; with regards the supplementary benefits, they are permitted in both jurisdictions (though Luxembourg will probably ask for non-discriminatory enhancements); separate payrolls can remain on current payroll for both solutions and individual eligibility for participation in the supplementary pension program is determined in both regions as per plan provisions.
Overall, Guernsey and Jersey seem in many ways more flexible while Luxembourg places greater emphasis on the security of the participants. However, Luxembourg has two big advantages that may well tip the balance. The existence of double tax treaties has the potential to save significant amounts in the long run. And secondly, there’s the geographical aspect. Luxembourg is in the EC and the middle of Europe and harmonisation, if and when it materialises, will treat Luxembourg very kindly.
Philippe Léonard is managing director of the pension consulting firm Employee Benefit International Consulting and Administration (EBICA) in Luxembourg-Kirchberg