Base for pan-European pensions?
Recent changes to Irish tax law and funds law in 2005, which significantly broadened the scope for using pooling vehicles known as common contractual funds, as well as changes to Irish pensions law, have helped Ireland in its efforts to attract international pensions business.
The Irish government has indicated that it is committed to making Ireland an attractive location for the establishment of international pension arrangements and is intent on working with all interested parties to ensure Ireland is the logical choice for multi-national employers seeking international pension solutions.
For this purpose, the Irish government has established a pan-European task force, representative of the pensions industry, service providers, technical advisors and the relevant government departments. The Industrial Development Authority has established a section within its international financial services division with responsibility for the marketing and development of Ireland as a prime location for a centralised pan-European industry.
In addition, Ireland’s long established and well regulated mutual funds industry makes it a popular yet well regulated jurisdiction to locate mutual funds. Ireland is home to a large number of international service providers as well as local experts on all aspects of funds set-up, management, administration and custodial matters. Ireland has had an active mutual funds business for over 16 years and it is estimated that the total value of assets currently serviced out of Ireland exceeds $1trn (e827bn). This cross-industry experience has made Ireland a preferred jurisdiction for the domiciling of all types of funds for many reasons, in particular, its ability to continue to develop new structures and products to meet market demand.
The Irish funds industry and the Irish government were aware of the attractiveness of tax transparent pooling vehicles for multinational pension funds where the assets of various pension schemes are pooled in one entity in a way such that the tax status of the underlying schemes is not prejudiced. The need for cost savings through economies of scale is a key attraction to many multinational groups.
To address this issue, in 2003 Ireland introduced a tax transparent vehicle known as common contractual funds for collective investment schemes coming within the UCITS framework. However, this response, though welcome, only covered UCITS schemes, which by their nature have relatively stringent investment restrictions.
It was recognised that a broader approach was needed and in 2005 changes were made to introduce into Irish law regulated common contractual funds which could invest in assets beyond the limited range available to UCITS schemes. Common contractual funds are not separate legal entities or trusts but rather are a form of co-ownership vehicles established under the laws of contract. The liability of unit holders is limited to the amount contributed or agreed to be contributed for units. The common contractual funds are tax transparent such that the income and gains of such vehicles are treated as arising or accruing to the unit holders and not to the vehicle itself.
Using this type of pooling vehicle, multinat-ional pension funds can achieve economies of scale, minimise fees paid to service providers and have a larger pool of assets to invest. This all can be achieved using an Irish common contractual fund, while at the same time not prejudicing the tax status and double taxation treaty benefits enjoyed by the underlying individual pension schemes operating in the various countries where the multinational is located.
A number of common contractual funds have already been authorised in Ireland and Irish service providers across all areas are well equipped to provide services for such vehicles. We expect to see multinational employers using Ireland as their location of choice for tax transparent pooling vehicles for their existing schemes.
The IORPs Directive sets a common minimum framework for the operation and supervision of pension schemes across EU member states. It also allows for the establishment of cross-border pension schemes, meaning that an occupational pension scheme established in one EU member states can provide benefits to employees in other member states. In theory, an employer could therefore operate a pension scheme in one member states to cover all its employees within the EU. Such an arrangement has the potential for significant savings for multinational employers. The main area where savings can be achieved is in investment but savings could also be achieved in administration, risk benefit premium and governance costs. There will also be some more efficiency with regard to expatriate policy.
The requirements of the IORPs Directive relating to cross-border pension schemes were brought into force in Ireland via the Social Welfare and Pensions Act 2005 (as supplemented by regulations) with effect from 23 September 2005. Overseas employers are now permitted to sponsor Irish schemes and Irish employers can establish and contribute to an Irish scheme which provides benefits in other states.
By embracing change and implementing in full the requirements of the IORPs Directive, Ireland is now ahead of many other EU member statess. The Irish government has sought a pragmatic and flexible approach to the implementation of the IORPs Directive in order to better place Ireland as the state of choice for establishing cross-border pension schemes. Ireland has therefore put in place, what it believes is the right regulatory and tax environment in order to fully embrace the opportunities provided by cross-border pension schemes.
Ireland’s relatively uncomplicated legal framework and complementary enabling tax regime boosts its position as a preferred location and domicile of choice for cross-border pension arrangements. Ireland boasts a good infrastructure in relation to the range of services that cross-border schemes will need. Ireland has a well established funded pension scheme practice, with experience, expertise and a regulatory framework in place. Given the overwhelming success of the International Financial Services Centre in becoming a European centre for the asset management and life assurance industries, both of which are closely linked to the pensions industry, Ireland stands out as a very strong candidate for the location of cross-border pension schemes. Not only does it have the expertise in administration of multi-jurisdictional assets, pensions law and pension consultancy but the Irish corporate tax regime will also make it attractive for many of the necessary support companies to operate here.
While many multinationals may be considering cross-border pension schemes, tax harmonisation issues, social and labour law requirements and (in the case of defined benefit schemes) the requirement for such schemes to be fully funded may still pose obstacles to achieving the goal of true pan-European pensions. However, the Commission and the ECJ are committed to the removal of taxation obstacles within the EU, as demonstrated by the Irish Finance Act 2005.
In the meantime, Ireland is in a position to provide efficiencies in relation to pensions for multinational employers. The most significant recent changes in Ireland are the introduction of regulated common contractual funds and the pragmatic implementation of the Directive.
Michael Barr and David Francis are with law firm A&L Goodbody in Dublin