Rightly or wrongly, offshore jurisdictions are associated with light regulation, and the main job of offshore regulators is perceived to be placing as few obstacles as possible in the way of multinational companies wishing to set up pension schemes for their employees. Guernsey, for example, has specifically exempted international pensions from its new pensions legislation.
So the idea of an offshore centre hoping to attract international pension business with a regime of pensions regulation may appear a high risk strategy.
Yet the Isle of Man is one offshore centre that has staked its reputation on the idea that the promise of good pensions governance will attract multinationals. It hopes that multinationals that are looking for a single well-regulated and stable location to use as a central retirement benefits unit will choose the Isle of Man.
The island is already a volume provider of international retirement products through its international life industry. However, it now wants to become a player in the expanding market for global pensions. And it sees pensions governance as the passport to this market.
Mike Lightfoot, international pensions marketing executive at the Isle of Man’s Insurance and Pensions Authority (IPA), explains. “We saw a time when the issue of corporate governance and governance within pension funds was going to come to the fore. We’re fairly and squarely in that period at the moment.
“We felt that, rather than rely – as most of the other offshore centres do – on some sort of tax approval to attract multinationals we wanted to go for something more comprehensive. We wanted to demonstrate that if a scheme was on the Isle of Man not only would it have the traditional tax benefits that you would assume with something being based here, but that the integrity was there, the governance was good, that all the proper checks and balances that you would expect from a properly managed scheme would have to apply.”
The first step has been to build a regulatory framework. The island has passed the Retirement Benefits Schemes Act 2000, a core piece of legislation which establishes a broad pensions framework for all schemes operating within and from the Isle of Man. The objective is to provide suitable protection for members and beneficiaries of both international and domestic pension schemes.
Under the umbrella of this act, the IPA has developed subordinate legislation with separate regulations for domestic and international schemes. Member protection is the same for both international and domestic schemes. However, the marketing objectives of the two pieces of legislation are quite different.
David Vick, chief executive of IPA, says: “The development of our Retirement Benefit Schemes Act was really seen as having two parts. There was the implementation of a more comprehensive regulatory regime for domestic pensions business on the island. But there was also a view that this was a good opportunity to look at whether we could create something which on an international basis would provide a good solid regulatory framework which would act as an encouragement to people to perhaps locate international type schemes on the island.
“We’ve taken the view that, particularly in the current climate, it will be perceived as a positive development to have a framework in place that on an international basis can give people some certainty as to the quality of administration and corporate governance they need.”
One problem the legislators faced was that, at the time, there was no template for pensions governance, no definitive international benchmark pension governance standards by which the Isle of Man could measure its international pensions infrastructure against that of other centres. However, in 2002 the OECD produced guidelines for the administration of private pension funds, which were designed to help protect people’s retirement benefits from mismanagement and fraud.
These guidelines, which are voluntary, are the first attempt to set international standards for the governance and oversight of collective pension funds. They propose a governance structure that incorporates checks and balances such as regular review by an independent auditor. They also propose that pension fund management should be legally accountable for protecting the interests of retirement plan members and beneficiaries. The guidelines have since been adopted as an international benchmark by the OECD’s 30 member governments.
The IPA says its international pension regulations meet with the OECD guidelines.
International Retirement Benefit Schemes can only exist in two formats: Authorised or exempt (excepted). The core requirements of authorised schemes are that all occupational schemes must have a trustee independent of the sponsoring company. Trustees must be “fit and proper” and acceptable to the IPA. The scheme administrator must be authorised and based in the Isle of man.
There is a 5% limit on the amount a company can self invest in an occupational pension scheme, although personal schemes are unrestricted.
Benefits must automatically vest after a maximum of seven years and staggered, stepped or cliff vesting is possible.
The IPA has avoided being too prescriptive about the way schemes are constructed or the dates at which benefits can be taken by members. Lightfoot says the regulations leave plan designers plenty of room: “So long as the core governance is there, the people are licensed and all the relationships are clear cut and comply with the Retirement Benefit Schemes Act, you can really be very creative when you’re designing a scheme. So if a company has a particular corporate objective that they follow, or a particular way in which they want to structure the benefits, they can really plan around that.
“We say that a scheme must be capable of providing relevant benefits. We don’t specify the format of these benefits. It’s up to the actuary to the companies to decide what benefits they want to provide. That give us a lot of scope for mirroring benefits in other jurisdictions. So if companies are operating in a certain jurisdiction where benefits would be provided in a certain way in that area, that could be backed into our infrastructure easily.”
The IPA has deliberately kept the authorisation of a pension scheme separate from its “approval” for income tax purposes. This is because it expects that most international schemes that seek authorisation from the IPA will not also seek approval from the tax authorities, since this will impose restrictions on the form benefits can take in return for only slight tax advantages. However, it will be possible to have international schemes which are both authorised and approved if that is what is wanted.
Some schemes are exempt from authorisation – notably those operated by life assurance companies The reason for this is that governance and consumer protection in the life industry is already extremely tight. The IPA’s general supervisory powers apply to life offices so they are already monitored for governance and general compliance. There is also a Policyholders Protection Act, with 90% of liability protected. Additionally, the Financial Services Ombudsman Scheme applies in the Isle of Man for all insurance products.
However, life assurers may choose to have some schemes authorised, Lightfoot suggests: “What we are seeing increasingly is that the life insurance offices are looking at the packaging and product development opportunities around having authorised schemes.”
Lightfoot says the pensions governance initiative is already paying off. “We’re finding the governance message now is selling and companies are actively contacting us and looking at the Isle of Man because they can see the good governance that comes as part of the package.”
Over 30 schemes have been authorised by the IPA in the first 12 months. The schemes generally fall into three categories: schemes set up for the expatriate workforces of multinational businesses, one or two person schemes for globally mobile executives and ‘corresponding approved’ schemes established for foreign domiciles working in the UK.
Most of the of the interest has come from existing markets, says Lightfoot. “Traditionally, the Isle of Man has always had very close affinity with certain markets. Part of the objective behind this initiative was to get out and open new markets and we find we’re getting inquiries from different areas. But 80% of your business is going to come from where it’s always come from.”
The Isle of Man is not part of the European Union and therefore the pan-European pensions market is not a prospect, he says “We are very much looking at opportunities outside of Europe. We’ve had interest from the Middle East and the Far East. We’re already dealing with enquiries that are coming from places lie South Africa. So interest has been very global.”
Other Isle of Man initiatives could give impetus to this interest such as the Island’s intention of negotiating bilateral double taxation treaties with other jurisdictions. The ultimate aim is to have a framework of pensions governance that is recognised internationally. When this happens, the Isle of Man will have proved its point.