The arrival of the new European Pensions Directive has a special significance for a country like Luxembourg.
One of Europe’s financial hubs, Luxembourg has long been waiting for a legal framework to support its ambition of becoming European pension fund sponsors’ favourite choice when it comes to selecting a domicile for their future pan-European schemes.Tax-friendly measures for pension funds introduced in 1999 make it possible for Luxembourg to become, along with Ireland, a good candidate.
The supervisory authorities have paid a lot of attention to this subject, working on getting the right structure ready to attract plan sponsors from across Europe.
“The supervisory authorities have been following any developments regarding the directive very closely,” says Fernand Grulms, director at Pecoma Consulting & Management in Luxembourg. “They’ve been focused on how the law should be modelled to make it possible for potential foreign pension fund promoters to chose Luxembourg as the domicile for their pension fund.
“Regarding this I would say that the directive represents a very important step in this process because it means that if you make a cross-border offer for a pension fund you will have a legislation to support this and it won’t be illegal any more.”
Having the European Court of Justice (ECJ) on national soil has also meant that recent rulings, such as the Danner case, have attracted more attention in Luxembourg than in other European countries. “The tax problem for cross-border pensions has not been completely solved as yet but the ECJ has been looking into the subject and even the European Commission has warned six member states about their tax structures. So even though the directive doesn’t provide a solution for the tax problem I am confident that this subject could be resolved,” Grulms says.
However, other aspects related to the setting up and management of pan-European pensions seem to be more difficult to resolve. “What concerns me the most regarding the future of pan-European pension funds is the different social security laws and actuarial principles across member states,” he says. “In this respect there is absolutely no harmonisation and you would need to be a real specialist in each individual pension law to address this issue.”
For these reasons, Grulms believes it will take some time for pan-European pensions to arrive. “But they will come,” he says.
If these are the problems faced by those involved in the development of pan-European schemes, things are not much easier for Luxembourg pension funds. “The directive will mean that there will be a need for a complete review of the pension fund legislation in Luxembourg, because in some aspects it’s not in line with what the directive says,” says Grulms. “Our supervisory authorities are already working on this and a lot of definitions in our law will have to be amended.”
In what is still a very small market for pension funds, the past few years have seen great development.
“We have now 10 pension funds that have been set up during the past three years and there are some more in the pipeline, which is not bad,” Grulms says. “This is quite a good success for a market the size of ours. Pension funds need a certain volume to be financially possible to operate and in Luxembourg there are only around 25 companies where talking about setting up a pension fund is really worthwhile,” he adds.
Although it will be interesting to follow the developments regarding the domestic market, Luxembourg’s objective to emulate its success as the top financial centre for investment funds by becoming the number one centre for pan-European pension schemes will no doubt be the subject in which European pension professionals will be most interested.
The arrival of the Directive will mark a new era for those who during the past few years have been building the right framework to create pan-European pension schemes. From now on other European countries will have to do what Luxembourg has being doing since the late 1990s by considering pension provision at an European level instead of using a purely domestic perspective.
Despite the fact that the development of ASSEPs and SEPCAVs, the international pension structures developed for the cross-border market, has been lower than predicted and many sponsors still show a wait-and-see attitude regarding these vehicles, the arrival of the Directive will increase the debate on the need for Europe-wide solutions when it comes to retirement provision. The outlook is positive.Not much will change in the next couple of years but significant developments are expected in the next decade.