Belgium stealing a march
The easy option would have been to translate the European directive on pensions into national legislation," says Philip Neyt, chairman of the Belgian Association of Pension Institutions. "But in Belgium, we decided to go a bit further, by creating a total new framework for European pension funds."
Neyt, who had taken over as chairman earlier this year, had dropped some hints of his thinking and talked publicly of the opportunity for Belgium to become a centre for European pensions - an aspiration that could easily be dismissed as wishful thinking and pipe dreaming, if such happens in pensions circles.
But Neyt, who had successfully created and built up the Belgacom Pension Fund into the country's largest and one of the most advanced only to see it dashed from his grasp as the fund was reabsorbed by the state, is made of determined stuff, particularly when he has a mission.
Currently he is chief public affairs officer at Belgacom in Brussels. So he certainly knows how the system works.
Though the country was well on the way to drafting its EU-directive compliant legislation, he went to see the top people in the government with a proposition. "I asked ‘shouldn't we be somewhat more ambitious, given the example of Luxembourg and Ireland with their contractual funds pooling vehicles?'"
He pointed out to senior ministers that no country had yet established a real framework for pan European pension funds. "What Ireland and Luxembourg have done is simply the pooling of the assets. It is not a pan European pension fund as they do not have the right vehicle."
But probably the clinching point was his fears for the future of the Belgian pension fund industry, which is not large with many of the pension funds set up by multinationals' subsidiaries. "My argument to the government was that when another country puts such legislation in place within five years, how many funds would be left? Most would disappear. Therefore we should make it attractive here for existing funds and then encourage others to come to Belgium."
His ideas fell on fertile ground when he suggested that Belgium should work out a structure where multinational companies could not just pool assets, but could create an EU-based pensions entity under the control of the Belgian regulator - the Commission for Banking, Finance and Insurance (CBFA).
This meant a complete step change from where the rest of Europe was at. "Where you have pooling of assets, you still have all the different pension funds acting locally, resulting in different regulators across the different member states." He firmly believes that multinationals want the capability to go beyond pooling and have "centres of excellence where they can bring all the different expertises needed together" to run their pensions across Europe. So all the services that are required be they actuarial, legal, administrative and so on, as well as investment and custody would be to hand.
The model Neyt pointed to was that of the ‘co-ordination centres', which Belgium had successfully operated for decades enabling treasury and other corporate activities to be done in a favoured environment for multinationals operating in the EU and further afield.
The ministers' response was a request that Neyt set out a short framework that could be considered. Once presented, this was quickly approved by the Council of Ministers at the beginning of May this year.
There were three core pillars to this framework and the subsequent legislation, he says. First was to create a new legal entity that would embrace all pension funds, including those already established in Belgium. This is the Organisement de Financement de Pension (OFP).
This vehicle could apply to local pension activities only, those funds that have cross EU border activities, or both. So whatever the location and scope of employers' activities, they could be covered by the one pensions entity that would be "flexible and transparent".
The second pillar comprises "flexible prudential regulations" operated by the CBFA. "It is important that these are not too rigid," says Neyt. "As we are dealing with long-term liabilities, it is important to have a regulator that is firm, but can have some flexibility as well in their approach." However, the supervisors would be acting in the best interest of the members and beneficiaries.
The third dimensions related to tax transparency and ensuring the structure is a tax efficient vehicle. "Belgium is going to move to the EET (exempt-exempt-taxed) basis. Currently the pension assets in ASBL structures used by 95% of funds are taxed in this country at 0.17% annually." There can be dividend and coupon taxes as well. Many Belgian funds therefore use Sicav investment funds as these can recover these taxes. "Our new pension vehicle will not have these constraints."
Just before the parliamentary recess in July, on the last day of business in fact, the law was approved and following that the Council of Ministers at the end of July changed the fiscal regime. While the law has still to be officially published in the law gazette, the new legal framework will be in place by the end of the year, says Neyt.
The move to the EET model, exempting all the investment from tax has to be a welcome provision for Belgian sponsors, whether of company or sector arrangements. It of course brings the country into line with most others, an essential step for attracting pension funds.
ll the tax on investment income can be recovered by the fund, in Neyt's view. "We will have the same regime for the new entity, so the OFP will be able to benefit from all the double taxation agreements(DTAs) that Belgium has with other countries.
"Our DTAs are much more favourable than those that Luxembourg has," he claims.
He is pleased that the new tax arrangements will mean that pension funds will not need to use Sicavs in the future for tax reasons. Many commentators have long felt that investors used these funds more for tax than investment reasons, and that portfolios suffered as a consequence.
The law requires that existing Belgian funds will have to move to the new OFP structure with a five-year transition period. "Most funds will do this immediately," he reckons, as the new structure will have distinct advantages, including tax.
This is the first time that Belgium has a specific vehicle for pension funds. Neyt sees this as a particular strength as it means that the legal framework covering OFPs is only likely to be affected by pensions related considerations. This contrasts with the ASBL, for example, which is used for a variety of different purposes and can be affected by legislation changes that have nothing to do with pensions. "In fact, we originally tried to see if the existing laws could be re-written, but we decided that this was not possible, as it would be too complex."
The new sector plans, which have to adopt a new legal structure before the end of 2006, will be able to use the new OFP structure too, Neyt notes.
The law requires that there be a supervisory body within the OFP and allows for the creation of one or more operational bodies. The aim of the law is to provide a framework that can meet most of the needs of multinationals and other pension funds, by being light on prescription, to enable sponsors to draft the rules that are appropriate to their funds' needs and the jurisdictions where they have operations. "The actual competencies of these bodies will be put in the fund bye-laws developed by the sponsors."
The law provides that one of the bodies within funds could be ‘social committees', says Neyt. "These are there to facilitate employee consultation and participation." This is in line with the provisions for host country control within the directive, relating to the social and labour requirements. Neyt regards anticipating these requirements as an important aspect of the OFP structure.
The OECD guidelines on pensions governance were the guiding principles, he says leading to the structure of a supervisory body and a separate operational body, but with the actual format to be determined by the bye-laws inserted at sponsor level.
The fact that there will be just one law relating to OFPs and their operation, will make it easy for multinational and other plan sponsors to set up in Belgium, particularly as an English version of the law will be published. "So for the first time in Europe, we believe there is a law that can be used in this way; it can even be used by those without any Belgian activities."
Under Belgian law, the funding requirements for pension funds, the technical provision is based on a 6% liability discount rate, says Neyt. "This is extremely important for a lot of companies, as in other countries
the rate is lower, requiring higher funding. Our view in Belgium is towards the longer rather than the shorter term." Most funds in Belgium have a liability duration of 15 to 20 years, or even longer. Most corporates do not want to put more into their plans than they have to, he says. "This could give them more flexibility on the funding requirements."
In other countries the funding requirements have become extremely strict, he points to the 105% of liabilities needed in the Netherlands. "So if a Dutch fund comes to Belgium under the new legislation, it will create a much larger buffer under Belgian legislation. If you are fully funded at a 4% discount rate, you are going to very well funded if you use a 6% rate. Then you have much more risk budget for your investments."
As an added feature, Neyt managed to get the authorities to look at the country's investment fund structure and agree to introduce a fund that can be restricted to institutional investors. "We have developed a framework for institutional investment funds." This is to be introduced by Royal Decree.
"This means that a pension fund can set up their own investment fund or unit trust. In addition a group of institutions can set up a fund, or a pension fund can establish an investment fund that can be used by other institutions." This could be advantageous in providing unitised investments to other pension funds. "Smaller funds could have access to the investment expertise of say a larger fund," he says.
Though within Belgium, funds will still need to meet the guarantee return of 3.25% on contributions throughout the lifetime membership of contributors. "This will only apply to activities in Belgium," he points out.
Neyt believes that the supervisory structure in Belgium has the necessary competences on the regulatory side. While the legislation allows funds scope for self-regulation to a greater or lesser extent using the internal bodies within the OFP provided for under the OECD guidelines.
"The fund has a responsibility to put in place the appropriate governance for its needs." This will depend on the countries where the sponsoring employer operates for the social and labour aspects of the fund. When an employer is setting up the legal structure it will submit the details with the bye-laws of the fund, which the Commission will review, but purely to see that they are consistent with the law.
"So if the composition of the fund's supervisory body is stated and that of the operational body, these will be examined to see that they conform with the law. What is mandatory will be laid out in the law - all that is not in the law is not mandatory."
By building on its current experience of running pension funds and providing the services required, he believes Belgium can be a centre of excellence for such services, something that Luxembourg, for example, does not have expertise in at present. This could be very beneficial to the local asset management industry and insurance companies, in his view.
During the period of discussion and fleshing out of the detail for the OFP concept, the input of multinationals and their representatives was sought. "All through the process, we checked out our approach. We also brought in a number of international law companies and international consultants."
The task force included people from local operations of multinationals, who were asked to check out the ideas with their headquarters outside Belgium. "We did not just want the local viewpoint, it had to be wider." This process yielded good input and insights as to what these groups really wanted. "All their comments were really taken into account."
Neyt made a point of including the political opposition within his canvassing of support. He saw this as very important for the longer term sustainability of the framework that they had a full understanding of it. Oppositions become the governments of the future, he points out.
In his networking among parliamentarians and others, Neyt was able to stress the bigger picture and the need to take a national view rather than the usual route of normal political debate and the confrontation inevitably involved. "As a result they understood the international and not just the local objectives to be achieved." In the end, all the different parties were on board about the initiative.
Neyt is determined that the initiative does not just stand still at this stage but that the message is taken out to the rest of Europe and perhaps further afield that Belgium is to be the centre for pan European pensions operations.
"We could be doing roadshows and taking other initiatives to promote what we have achieved." The new framework is good for those already established in Belgium, the real prize will be to attract the multinational and other international business.