Almost five years ago, Luxembourg passed the legislation that created three new types of international pension vehicle.
The Loi RCP of June 1999 enabled the creation of the Sepcav, an open-ended pension plan which operates like a DC plan in the US, and the Assep, which is similar to a DB plan. A third vehicle, similar to the Assep, was launched by the Commissariat aux Assurances (CAA), Luxembourg’s insurance regulators, a year later.
Luxembourg’s aim was to capture a share of the expected market for pan-European pensions in the same way that it had captured a large share of the mutual funds market in the 1980s with the swift development of its UCITS.
However, progress with international pensions has been slow, as both the new vehicles’ promoters, the ABBL and ALFI, and their regulators, the CSSF, have conceded. Both have blamed it on the serpentine progress of the European directive on Institutions for the Provision of Occupational Pensions (IORPS).
Only 14 international pension schemes have been launched since 1998, and one of these has closed. Furthermore none of these are – as yet – truly pan-European. Most are plans that have been established initially for Luxembourg-based employees and which can be rolled out later for employees elsewhere in Europe or the rest of the world, (see table).
Only a few have set out to be immediately international in scope. These are the multi-employer plans aimed at international companies with operations in Luxembourg. The most ambitious of these is the K-Bridge Assep, launched by the Icelandic banking group Kaupthing and aimed at expatriate executives of multinationals in Switzerland and the rest of Europe.
Kaupthing Services, Kaupthing Bank’s subsidiary in Lausanne, is managing pension plans denominated in US dollars and Swiss francs as well as euros. Starting from a base of six non-Icelandic multinationals with 40 employees it plans to accumulate 10,000 pension fund members and c15m assets under management within three years.
The slow progress of pan-European pension plans in Luxembourg has been blamed partly on Luxembourg’s own bureaucratic processes. ALFI and ABBL, which represent respectively Luxembourg’s fund managers and bankers, point the finger at the IGSS (L’Inspection Générale de la Sécurité Sociale) which regulates pension plans set up by Luxembourg companies for their employees under the Loi RCP.
They point, in particular, to the obstacles which the IGSS has placed in the way of supplementary pension funds and schemes through its own interpretations of the Loi RCP.
There is also some criticism of the Loi RCP itself – in particular the capital requirements of Asseps and Sepcavs. The law insists that the capital of a Sepcav may not be less than c1m or its equivalent in a freely convertible currency, and that this minimum must be reached within two years following the authorisation of the Sepcav. The technical provisions of an Assep may not be less than c5m. This minimum must be reached within 10 years of the authorisation of the Assep.
The problem, some say, is that the law was drafted by legislators with a banking background who were unnecessarily concerned about solvency requirements. One Luxembourg pension expert comments: “It actually doesn’t make a lot of sense with something like pension funds, because pension funds are like oak trees. You start off with an acorn – it could be only two people in a scheme – and then it grows.”
Other problems may have been the up-front costs of the new vehicles. When Alliance Pension Fund (APF), Luxembourg’s first Sepcav, failed to raise any funds, the plan’s $10,000 start up fee was blamed.
However the main culprit has been the European directive on Institutions for Occupational Retirement Provision (IORP) which has taken more than two years to drag its length from draft to adoption. The Loi RCP was drafted originally to provide a legal framework for the new market for international pension funds that was expected to develop following the adoption of the IORP directive.

The designers of Luxembourg’s Sepcavs and Asseps were to some extent wrong-footed by the actual provisions of the directive, in particular the so-called social and labour clause. Clause 37 of the directive states that “the exercise of the right of an institution in one member state to manage an occupational pension scheme contracted in another member state should fully respect the provisions of the social and labour law in force in the host member state insofar as it is relevant to occupational pensions, for example the definition and payment of retirement benefits and the conditions for transferability of pension rights.”
This was not anticipated. The requirement is seen as an obstacle, but not insuperable, by Luxembourg lawyers. Isabelle Lebbe, barrister and partner at the investment management practice at Arendt & Medernach in Luxembourg says it might have been expected. “It’s certainly true that conforming to national social and labour laws leads to quite a complexity for setting up the pension fund. On the other hand I don’t think that we expected that it wouldn’t be the case. When people are working in a country they rely on the social system of that country. Even if you set up a pension fund in another country , you have to keep in mind those requirements concerning social and labour laws.”
Undoubtedly the biggest obstacle to progress in the past has been tax discrimination by EU member states. which allow the tax deductions of contributions paid to national funds while refusing the same deduction in the caser of foreign funds. Now EC has put its foot down and called on members states to cease their discriminatory procedures.
The Danner and Skandia rulings on tax discrimination at the European Court of Justice (ECJ) appear to have closed the book on the issue. Anne Contreras, pension fund specialist at Arendt & Medernach, says that now that the tax issue has been resolved, European legislators are likely to turn their attention to other issues: “I don’t think there are any tax barriers in law because the rulings of the ECJ are very clear. Now there are other obstacles and these mainly depend on the social security laws. So I wouldn’t exclude a further ruling from the Court of Justice.”
Recent ECJ rulings suggest they will be pragmatic about social and labour laws, she says. “The ECJ seems to understand the need of international pension funds. The need to state that even if national barriers do not need to be removed, they should be at least proportional to the need for national protection. For example, they have to take into account the existence of a sufficiently protective system in place in member states. We really hope that this will be confirmed in case law, specifically addressing pension fund issues.”
Now that the IORP directive has been adopted and the ECJ rulings on tax discrimination have been accepted, the progress of Luxembourg’s pension vehicles could be expected to accelerate. James Ball of JBI Deloitte in Luxembourg, who is currently involved in the design of Asseps and Sepcavs, says the vehicles have performed as well as they could in the circumstances. “Everything has happened in the way that we said it would happen. However, even with our pessimism, it has taken longer than we expected. This has nothing to do with the Grand Duchy and everything to do with the time it’s taken the IORPs directive to come through.”
Yet he says that Luxembourg always realised that the new pensions regime would need time to bed down. “We certainly expected a three year shoe-in period in a situation where you’re cutting your teeth on a few expatriate schemes.
“What has happened now is that a lot of the people who were very involved in banging the drum at the beginning have dropped out extremely disappointed. The big bancassurers have been more realistic in their expectations and have consequently stuck with it.”
Significantly, bancassurers like Dexia have set up schemes that can be fully rolled out when the market develops, he says. “The bancassurers are using a combined strategy where they are saying ‘We have a domestic plan and we also have an opportunity to work with affiliates in Europe once the directive’s in place, but we also have an opportunity to sell that as a third party service, in the same way that they can offer mutual products or insurance products.”
So perhaps in another five years Luxembourg’s acorns will have grown to oak trees.