Flexibility is the key in modern pensions solution
The year 2000 saw the establishment of the first pension funds for mobile employees. Last year permitted Luxembourg pension schemes to part from the stage of theoretical concepts to the establishment of the two first international pension funds. Does this evolution pave the way for Luxembourg pension funds to gain wider recognition as a global pension solution ?
In June 1999, a new pension fund law was adopted in Luxembourg, creating two new pension vehicles, ASSEP1 and SEPCAV2. The year 2000 finally brought about the creation of the two first pension funds under this law. As expected, both are defined contribution schemes for expatriate employees. The first, created under the legal form of an ASSEP was the Unilever Pension Fund, set-up by the Anglo Dutch group for its highly mobile workforce. The second, called APF International, was the first multi-employer SEPCAV to be established. It was set-up by Barnett-Waddingham and Banque Générale du Luxembourg (a member of Fortis group) for Alliance Insurance Dubai, an insurance company operating in the Middle-East. With those first funds, an important step forward was made by proving that Luxembourg pension funds are viable solutions and not only wishful thinking of a financial place looking for new areas to expand into.
But why did those sponsors choose Luxembourg?
The objective of these pension funds is to take advantage of both the know-how acquired by the Luxembourg financial place in matters of investment funds (second only to the US in mutual fund assets) and the innovative and highly flexible legislation. In fact, the law, which respects the new European draft directive already on many points, regulates the basic legal aspects, while most details (type and level of promise with the underlying financial risk, vesting period, membership) are defined by the plan sponsor in a set of mandatory, yet flexible guidelines, thus allowing for tailor-made solutions.
Flexibility, one of the key characteristics of Luxembourg pension funds!
For instance, the umbrella structure already implemented in the APF International case allows the use of different pension schemes within the same vehicle while enabling them to benefit from economies of scale in administration, as well as from higher levels of financial performance and control. In a multi-employer structure, special arrangements between the sponsoring company, the compartment’s administration board and the pension fund guarantee the independence of the respective compartments in matters of investment strategy and liability.
Furthermore, compartments may take into account national or local characteristics of legal, fiscal or other nature. They can be formed according to the sponsor’s choice in matters of promise (defined benefit / defined contribution), investment strategy, definition of membership, employer or employee contribution, inclusion or not of bio-metric risks and other features.
As mentioned before, an important advantage is the flexibility with regard to the choice of asset allocation: Legislation only requires compliance to the ‘Prudent man’ principle (for example diversification in order to reduce risks and to gain an optimal asset-liability matching) and imposes no quantitative restrictions, thus allowing investment strategies with larger equity positions and international holdings. This approach gives professional asset managers the possibility to take full advantage of market opportunities with the use of a broad choice of investment strategies including so-called ‘Lifestyle’ and minimum guaranteed return investment strategies.
Luxembourg legislation allows also for both a high level of security and control.
First of all, there is a clear separation between the pension fund and the sponsor. Furthermore, the CSSF (Commission de Surveillance du Secteur Financier) is the supervisory authority in charge of both investment and international pension funds and has to receive periodic information, as well as audited reports from the pension fund. The CSSF is also competent for the registration of service providers (asset management, actuary) in Luxembourg. Last but not least, in the beneficiary’s view, portability (transfer of acquired rights to another occupational pension scheme) is assured.
The combination of these aspects should offer a competitive solution for coherent world-wide pension schemes which many international companies are looking for. The advantages of such a global approach compared to a collection of locally based plans are an optimised asset management due to pooling of assets, a reduced number of service providers, therefore a simplified administration with increased control and homogeneous reporting at a reduced cost and finally, consistent benefits for all members irrespective of their geographical assignment.
Luxembourg law requires service providers to be registered with the supervisory authority CSSF, with the exception of the custodian bank, which has to be domiciled in the Grand-Duchy. Among other leading specialist providers, Banque Générale du Luxembourg is offering either a one-stop product, or unbundled services with partners selected by the sponsoring company and approved by the bank.
On the taxation side however, despite the country’s numerous double taxation treaties, the lack of fiscal harmonisation in Europe is currently considerably hampering the emergence of pan-European pension schemes. Nevertheless, recent progress on the European level seems to point in the right direction.
Concerning expatriate schemes, the fiscal aspect is less important to multi-nationals and is often widely outweighed by the many advantages of a global solution. Therefore, a Luxembourg umbrella pension fund starting with a core of selected countries and then expanding through incorporation of pan-European schemes according to the evolution of fiscal harmonisation, should finally lead to truly global pension schemes.
The rising interest in Luxembourg-based pension funds, as proven by the ever increasing number of projects, seems therefore likely to establish Luxembourg as a leading centre for fully-funded occupational pension schemes.
Michel Duhr is fund engineer in charge of pension funds at Banque Générale du Luxembourg’s investment funds and professional banking department. Banque Générale du Luxembourg, a leading bank in the Grand Duchy of Luxembourg, is a member of the Fortis Group
1 ASSEP (Association d’épargne-pension): legal form of a non-profit association, where the scheme member is a creditor of the pension fund. It is designed for both defined benefit and defined contribution promises and allows both lump sum and life-long/annuities payments.
2 SEPCAV (Société d’épargne-pension à capital variable): relatively simple legal form (comparable to a SICAV) where the scheme member has the statute of a shareholder. It is solely designed for defined contribution promises and allows only lump sum payments.