Belgium last year became the first country to pass pan-European legislation for a pensions vehicle - the Organisation for Financing Pensions (OFP) - to enable pan-European pension funds to operate in and from the country. Its aim was to incorporate the European IORP directive and make Belgium more attractive as a location for pension schemes by drawing in companies that want to set up pan-European arrangements. But several months after the introduction of the OFP, what has been the effect of the legal framework?

Johan Heymans, managing consultant at Watson Wyatt Brussels, says that due to the promotion of the Belgian framework by the prime minister, the president of the national pension funds, the minister for pensions and others, awareness within the Belgian market is already high.

But international awareness is not on the same level. He says: "Belgian multinationals are considering creating pan-European pension fund for their subsidiaries and some are already looking closely into it. But non-Belgian multinationals are reluctant to take this course and some question why they should investigate any further, which I think is due to self-protection. They don't want to say that their pension funds would move to a different country, which would involve job cuts and affect the funds, advisers, consultants and investment managers. Of course, multinationals are looking at it, but it's not their first priority."

Yves Corne, principal of the international group at Hewitt in Brussels, adds that the new legislation has been looked at and received positively from a local angle because it affects local players and funds.

Thierry Laloux, retirement business leader at Mercer's Brussels office, also reports local interest in moving from the existing ASBL pensions vehicle to the new OFP structure for tax reasons. But on a pan-European level, he says, companies remain cautious and are waiting for a full picture of the changes following the implementation of the IORP directive.

Heymans believes that international interest would be boosted if a local multinational were to set up a cross-border fund. He says: "As we haven't seen any interest from multinationals outside Belgium so far, a big Belgian or Dutch multinational close to Belgium will probably be the first to create a pan-European pension fund. And almost three or four big Belgian multinationals need to operate such a fund before others will follow."

But there is still a general feeling of cautious optimism that Belgium will prove to be an attractive location for cross-border pension funds. Heymans says: "I strongly believe that with this new system Belgium is at the forefront of pan-European pension funds - tax and otherwise - but it is difficult to convince the industry. Belgian consultants are restricted in their promotion of the system outside Belgium because of a lack of resources. The only condition existing in Belgium that could put off multinationals is that its pension fund market is not as mature as others. It does not have the same level of investment expertise and number of consultants as, for example, exist in the UK or the Netherlands. Consequently, Belgian consultants are not as prepared to serve pension funds of a very large scale. That is why the aim of this development is also to make the Belgian pension fund industry more mature and attract more employment to the sector.

"The main challenges now are the promotion of the Belgian framework and raising of awareness of the opportunities abroad as well as the development of resources for pan-European pension fund administration in Belgium." In his view, in the first instance this cannot be done through Belgian resources alone as it needs to involve consultants from each of the firm's offices to service the participants in each country.

Heymans adds: "I think it will take two to five years for the first pan-European pension fund to be created because the subject needs to get onto company agendas. But once multinationals have fully investigated the pros, cons and incentives I expect some of them to opt for this tax-friendly vehicle and the greater freedom that comes with the Belgian legislation."

Corne notes that only a few companies have so far taken the step of using the
directive for a cross-border plan in an organised and strategic way. He says: "The promotion has caused a lot of Belgian multinationals to speak to consultants in a reactive - not proactive - manner about the vehicle and Belgium as a base for central funding."

He admits that interest from foreign multinationals is limited. "We are at a very early stage and some tax burdens still have to be tackled. But there is a clear understanding in the EU that pan-European funds will take off, and that should put Belgium in an interesting position in the European market.

"Consultants are already preparing communications for their clients about the changes. But it should really have been the implementation of the IORP directive that raised interest for pan-European pension funds, not the Belgian framework. However, a number of multinationals are still just getting to grips with what exactly the directive implies. I expect the first cross-border plan later this year, but a pan-European pension fund with four or five plans coming together in one central fund is not going to happen in the short term because it will require better analysis of the home countries."

Corne of Hewitt believes that the first use of the directive will be opportunistic. For example, a new plan in country A might be financed and avoid taxation through an existing fund in country B. He says: "We also need to be more open-minded about various host countries and can no longer ignore east European countries as locations for such funds. But to look at all the countries and get a level playing field will take several years. Belgium's initial legislation wasn't good promotion for the country. That is why I think the changes to the legislation are positive and will put Belgium forward as an interesting candidate."

Mercer's Laloux says that the establishment of pan-European pension funds is being slowed down because of concerns about various social aspects pertaining to different countries. He adds: "We have a pan-European committee that monitors the developments in various countries and we inform our clients accordingly. Although it will take another two to three years before the plans take off, we have already seen some requests from Belgian companies willing to move to the new structure. Some companies, however, will need to take the lead for others to follow.

"For Belgian employers, which have to guarantee a minimum return on defined contribution (DC) arrangements, moving from an existing local DC group insurance scheme to a pan-European plan means it now falls onto them to guarantee the minimum return. If they transform the Belgian plan into a pan-European plan in the hope of higher investment returns, they will also have to guarantee the minimum return that today is guaranteed by the insurer. That aspect needs to be taken into account."

But Laloux still expects pan-European DC plans to develop more quickly than defined benefit (DB) arrangements because of the locally driven liability management, accounting standards and minimum funding requirement issues under DB schemes. He is convinced that Belgium has developed an excellent framework from which multinationals can only benefit, but it needs the help of multinationals and consultants to promote the pan-European and Belgian concept.

Corne says Belgium's political neutrality and its small economy are to its advantage. In addition, today's legislation is friendlier to employers and employees than the one in the past. Corne expects governance to become a big issue in the new DC world and believes that companies that
are driven by better governance will emerge as the leaders in the pan-European pension development. The industry is now waiting for someone to take the lead, he says. And he expects that this will be done by a company less in the public eye, rather than a multinational.