Holland vies with Ireland and Luxembourg
As new financial products and financing methods are created, cross-border capital flows are growing at exponential rates. This in turn has led to a new face of globalisation, and one far different from that envisaged by the early Dutch explorers and merchant bankers. Foreign direct investment today more frequently takes place in the form of mergers and acquisitions rather than green field investment, which has created a sea change in terms of reshaping industrial segments at the global level.
One could argue that the Dutch invented globalisation, with their long history rich in foreign exploration and exportation for financial gain. It is therefore no surprise that The Netherlands remains home to some of the largest multinational companies in the world including Philips, Shell and Unilever.
In fact, the very first multinational company to issues shares was founded in The Netherlands. The Dutch East India Company (or the VOC - Vereenigde Oostindische Compagnie) was established in 1602 to carry out colonial activities in Asia. While its methods of maintaining its monopoly over the nutmeg trade were sometimes questionable, the VOC was an incredibly significant organisation in terms of expanding the Dutch influence on the world's economy. The company helped open up much of the world to trading with Europe. By 1669, the VOC had operations in Africa, China, India, Indonesia and Japan. It was also the richest private company in the world, with over 50,000 employees and an impressive dividend payout of 40%. In 1799 the company dissolved following financial troubles, but it had a long run and far-reaching success in terms of establishing The Netherlands as a sought-after trading partner.
Today as multinationals go in search of diversification and expansion abroad they typically take a different approach than the VOC. Cross-border M&A activity is on the rise, with global and European M&A in 2005 reaching the highest levels since 2000. This solid rebound, which began in 2003, looks set to continue and, with $872.6 bn of Europe-targeted M&A activity in the first half of 2006, it is already outpacing year to date figures in the US. A significant amount of cash is still held by private equity firms and other strategic buyers including multinationals, which means that this level of activity could continue for some time.
While freer cross-border capital flows help acquisitive multinationals to expand into new regions more easily, it does not eliminate the challenge of managing the pension schemes, which often come along with those acquisitions. The funded status and projected obligations of acquired plans can sometimes be the make or break factor for strategic acquisitions, much to the consternation of investment bankers and global pension directors. With the implementation of the European Pension Directive last year, we finally witnessed the potential dawning of a new age in the realm of pensions management for such companies which, to date, have long struggled with the many challenges of managing plans across different domiciles. This presents new opportunities for multinationals to improve and possibly streamline the investment and oversight of their European pensions.
If successful, these improvements will translate into greater economies of scale, better returns, and greater sustainability of schemes - all-important goals for multinationals today. Part of the reason lies in the concern of plan sponsors' ability to fund their future pension obligations. When viewed over the longer-term, this challenge can be particularly daunting. For firms whose schemes are based largely on inflation-linked guarantees to pensioners, the downside could be catastrophic if not managed prudently. And while some milestones have been achieved to make Pan-European pooling an easier undertaking, the fact remains that there is significant disparity in regulatory regimes that govern European pension schemes.
It is interesting to witness the debate that has taken place within the industry in the last few years. A casual observer might easily think that this is a boxing match, where the prize fight is between Dublin and Luxembourg alone, where the CCF and the FCP respectively are being heavily promoted as suitable vehicles for pan-European pensions. Despite the noise emanating from Dublin and Luxembourg, the fact remains that, as yet, no institution to date has created a single unified pan-European pension scheme using the FCP or the CCF - they have only been used to accommodate jointly invested pools of assets.
While those two jurisdictions certainly have their respective merits, it is premature to decide that they are the only options available to companies seeking to pool their pension assets in a tax transparent vehicle. It may be true that experience in delivering solutions to the offshore funds market provides solid credentials for these domiciles, but their experience in catering for the needs of pension schemes, or their regulators, pales in comparison to The Netherlands' and the UK's.
Unlike asset managers, who use these vehicles for creating fund of funds and umbrella structures, pension sponsors seeking to leverage such vehicles will be most attracted to their tax transparency and the acceptance by regulators in their local markets of operation.
These qualifications are important because schemes want to ensure that income earned by the fund will be treated in the same manner it would be if the schemes earned the income on a standalone basis - including access to any domestic and international tax privileges available to pension investors.When one compares the various jurisdictions in terms of regulatory aspects that promote the long-term stability and sustainability of pensions, it is downright impossible to ignore The Netherlands.
With its mature and well-funded pension system, The Netherlands is consistently recognised as a leader in implementing prudent funding rules, risk measures, and informed supervision. The March 27 2006 publication of the Dutch Ministry of Finance's resolution regarding Fonds voor Gemene Rekening (FGR or Fund for Joint Account) marks yet another milestone for multinationals seeking to pool their pension assets.
The abolition of Dutch capital taxes from the FGR - including subscription and withholding taxes on income distributions at the beginning of 2006 - makes it a legitimate competitor to the CCF, FCP and the UK PFPV.
For reasonable plan sponsors, regulatory arbitrage is not a driver when considering the potential benefits of pooling, however these moves certainly make The Netherlands a country to consider for those with pension assets already regulated there.
In some respects, The Netherlands may in fact offer the best of both worlds when it comes to the location of a "centre of pooling excellence", since it is also home to some of the most successful asset management, insurance and actuarial enterprises across Europe.
Creating the framework, however, is just the beginning. In order to achieve success, the Dutch will need to ensure that foreign regulators see the FGR as a viable option. In the way that the Dutch learned from their competitors in the East Indies, they too can learn from their competitors in Dublin. The Irish put their minds to promoting the CCF in all areas required to ensure its success as a destination for tax transparent pooled funds, and the Dutch will need to do the same if they want to compete effectively for this lucrative market space.
If achieving dominance as a pooling jurisdiction is a prize fight, as I mentioned earlier, then neither Dublin nor Luxembourg have delivered the knock-out punch yet; so don't be surprised if we begin to see interested parties within The Netherlands organise themselves and deliver the knock-out punch that will win the purse that Dublin and Luxembourg have been busy fighting over for the past 12 months.
Kerry Ann White is first vice president and head of multinational business development at ABN AMRO Mellon