While the main contenders battle on with the tedium of dealing with tax authorities and regulatory bodies pan-Europe, a rank outsider has joined the quest for the Holy Grail. Gibraltar is seriously considering pitching itself against Luxembourg, Dublin and the UK as the domicile of the pan-European pension fund vehicle. And it is open to new ideas should the European fund industry accept it as a worthy player.
At a seminar to be held in June, the Gibraltar government is to ascertain the levels of interest in yet another jurisdiction presenting itself as an alternative base to position the pan European vehicle. It is giving the fund industry an open floor to air its views but is likely to win support based more on despondency than anything else. “I think people are pretty fed up,” says Robin Ellison at lawyers, Eversheds in the UK which is advising the Gibraltar government. “I think people wouldn’t mind a clean sheet of paper.”
One of the “joys” of Gibralter, says Ellison, is that it falls under British regulatory standards, with the financial services regulation run by an off-shoot of the Department of Trade and Industry in the UK. And from a Europe-wide pensions standpoint it has a ‘clean slate’. “What the government is prepared to do is listen to their needs and build a legal structure which would suit them,” says Ellison. Gibraltar is planning to position itself more on the administration side than as a base for asset management and as such, few fund managers have set up there to date. “You can run the assets from anywhere,” reasons Ellison.
Since the explosion in initiatives in the mid 1990’s from Ireland, Luxembourg and the UK on the pan-European pension fund vehicle issue, the evolution and implementation of these ideas have been less than forthcoming, not surprisingly because of the tax headaches. “As far as anyone using PFPVs are concerned, it is going at a snail like pace,” says Jonathan Heller, managing associate of Jonathan Heller & Associates in London. “The process of getting it recognised by the pension authorities in the major European countries has just been so slow.” This consultant is actually in the very early stages of looking into whether a PFPV-type structure could be set up in a major country in Europe, but are unable to disclose any details for the time being.
PFPVs have been around in the UK for over five years now with few fund managers actually setting them up - only two PFPVs to date have been established in the UK and six other fund groups are in the throes of setting them up. The same situation purveys the Luxembourg market while the government deliberates on the set up of the ASSEP and SEPCAV legal structures, the fund industry’s attention has turned elsewhere to more fundamental, immediate concerns of gathering assets in existing vehicles.
However, the approval process has edged forward for PFPVs which is more than can be said for Luxembourg’s efforts. As it stands PFPVs have gained approval, that is to say they are recognised as tax transparent vehicles in the UK, Ireland, the Channel Islands, the Isle of Man, Belgium, Switzerland and most recently, Germany. Japan and Australia have also given their approval and France looks to be next in line as one of its preconditions for approval seemed to be inextricably linked with Germany’s actions, says David Butler at Ernst & Young in London. “There was an indication that France would be keener once Germany had signed up, but that hasn’t been fulfiled yet,” he says.
Ernst & Young are continuing to examine the subject of tax. A number of country’s are reluctant to take the proposal seriously while these tax issues prevent the existence of a true pan-European pension fund in the absence of a European directive. “Obviously a number of revenue authorities don’t answer hypothetical questions, so we are reliant on an actual situation before we get some clearances. “We have had meetings with the EC and have had their verbal support.”
Technically, multinational companies with offices in the UK, Belgium and Switzerland can set up some form of pooling structure for their pension schemes, under the PFPV agreement. “The way has been cleared for them to set up, but they would still want to get clearance in relation to their specific vehicle, but the way has been cleared for them to do that now.”
The Luxembourg government is yet to give its own approval on the jurisdiction’s initiatives on the pan-European issue but have given it their full attention, says Tim Caverley at State Street Bank in Luxembourg. “The Luxembourg government is ex-tremely committed to this and also they see it as the next wave for Luxembourg as a domicile and that is why they have been putting a lot of emphasis on it,” he says. “We think there is going to be a demand for it, particularly from the large multinationals,” but adds “I don’t think there is going to be a huge inflow from the start, there is going to have to be some marketing and some ongoing discussions relative to the viability of the whole structure.”
Dublin continues to focus its energies on the viabilities of existing mechanisms as opposed to creating new ones. The Irish investment limited partnership, set up in 1994 to attract US fund investors, and similar to a US common investment fund, is oft referred to as favourite choice of the fund industry. Peter O’Dwyer at PricewaterhouseCoopers in Dublin says that they are evaluating the structure in terms of its suitability as a tax transparent ‘pass through’ vehicle, and have now ascertained the countries where it could work in Europe - the UK, Netherlands and Switzerland, though no effort has been made as yet to approach theses countries’ authorities for their views. “Nobody’s actually done it, it’s all theoretical at the moment,” he says.
While Eversheds’ Ellison supports the Irish initiatives on investment pooling, he feels that the overfocus on the eventual investment vehicle is to the detriment of the wider picture. “When the European directive comes through it is a bit of a non-issue. I think they are struggling very hard to devise common investment pools, although they are handy, my guess is if the European directive comes through sometime at the end of this year, beginning of next year, it might not be as necessary as they think they are,” says Ellison. Issues which should be tackled head on, he says are more related to compliance and fund administration. He adds on the Irish research: “Those are for investment pooling problems, and by and large it is a problem you can get round, not at all easily and there are problems with tax recovery and dividend credits, but it is not impossible.”
Jonathan Heller & Associates is in fact involved alongside insurance company, Zurich in developing a system to pool the pension assets into the chosen structure using reinsurance as a technique. The project is being sponsored by a number of companies throughout Europe. “It would actually in theory be complementary to_PFPV because you have an issue about how most efficiently to gather together the assets and you have an issue on what vehicle you are ultimately going to use for managing the assets,” says Heller.
The principle would be to pool the insurance assets of the pension funds into a single reinsurance vehicle which would use underlying pooled vehicles to get exposure the varying asset classes. A PFPV might not be ideal and a SEPCAV would probably not be a good vehicle for it either, he admits, which leaves the Irish pass through vehicle. Heller says the Irish proposed structure looks most promising, though he adds: “They are not the only possible model. A question people have pondered about is whether the Spezialfonds are for instance another type of vehicle you could use this way.”
The principle behind the idea has been that up until now the industry has focused mainly on the segregated company pension schemes and tried to figure out ways to pool those assets into a vehicle and have avoided tackling the insurance-backed schemes. “The insurance funds have been placed in the ‘too difficult’ category because, how do you get them away from the incumbent insurer who is doing the asset management?” he asks. “What we are actually interested in and are working with them to do, is to say it doesn’t only have to be the segregated plans, you can actually incorporate the insured plans into the structure using reinsurance.” The assets may end up in the same vehicle he points out, but the issue behind this model is that it will allow companies to pool more of their pensions assets into one fund by using a reinsurance company as a part of the whole process.
Key European tax authorities and regulators who have given their initial approval and they are shortly having to submit a detailed proposal to these authorities in eight targeted European countries. “I am pretty optimistic - when we finally go to the authorities to seek approval that is when we will find out for sure, but we have been to the authorities at a very senior level in the country where we are expecting to put the captive insurance company and we have been told, yes, we think it works.”
The actual domicile of the reinsurer is quite instrumental in the whole process he says. “It is important in terms of the acceptability of the arrangement to the pensions authorities in the states where the money is being ceded out of. It is important from the tax viewpoint and it is important in terms of the administrative back up that you want.”

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