Since 1999 Luxembourg has been readying itself for the opening of the European market, the backbone of this preparation being its flexible and innovative laws and regulations. But even though the legislation ought to require only minor changes to be compliant with the European directive in the making, the subsisting fiscal hurdles continue to prevent a breakthrough of Luxembourg-based pension funds, limiting their scope essentially to expatriates and top-hat solutions, as well as the relatively small domestic market.
Since the introduction of the highly flexible new pension fund law in June 1999, three pension funds have received approval by the supervisory authorities. The first were expatriate solutions like the Unilever pension fund incorporated under the legal form of an ASSEP 1, followed by APF International, the first multi-employer SEPCAV 2, which is commercialised in the Middle East. Finally, a first domestic pension fund was created by KPMG, while several more international and national pension funds, including at least two multi-employer structures, await approval by the supervisory authorities or are about to be submitted for scrutiny.
Furthermore, the grand-ducal regulation dated 31 August 2000 introduced a new form of pension funds placed under the supervision of the Commissariat aux Assurances, the supervisory authority for insurance companies, which are slightly different from the legal entities created under the ASSEP and SEPCAV legal forms.
To optimise the existing legislation and as a proof of the reactivity of Luxembourg’s authorities, an amendment to the 1999 pension fund law has been voted on 11 July 2001. The major modifications include :
q The pension regulations are no longer part of the articles and are therefore not to be published any longer, to guarantee confidentiality and facilitate later amendments.
q The contributing company can provide seed money 3 at the moment of creation to allow for diversified asset management. As new members join the scheme, the employer’s upfront payment is reduced.
q The custodian receives the additional duty of checking whether payments by the contributors are made on a timely basis.
q The rules regarding the appointment and the duties of the asset and the liability manager are largely clarified.
q With respect to umbrella pension funds, the provision that assets of a subfund may not be used to meet the liabilities of another subfund is maintained, but the bill permits the articles of incorporation to derogate from this principle.
q A foreign company with a social object similar to a Luxembourg pension fund can change its nationality to become a Luxembourg company and vice versa.
q The amendment also brings additional clarification regarding the liquidation procedure of a pension fund.
q Public reports are to be published on an annual basis only. Bi-annual reports have been abolished, as for some pension funds there is only yearly contribution and NAV calculation and there still is quarterly information to the CSSF, the financial supervisory authority.
q Finally, concerning both ASSEP and SEPCAV, pertinent information (register, acquired rights and paid benefits) has to be provided to the tax authorities on an obligatory and spontaneous basis by the end of the month following the closure of the social year. The objective is to improve fiscal transparency and the acceptance in other countries through exchange of information.
Trends and projects
To implement truly pan-European pension schemes, a breakthrough in European harmonisation and coordination has to be achieved. As in many other countries, professionals await with impatience the European directive and a final breakthrough on the fiscal issue. Meanwhile, the only viable global solutions are either expatriates or top-hat solutions, but the major players closely follow the developments in surrounding countries so as to be ready when an occasion arises to enter these markets.
Christiane Campill from CSSF says that, although only three pension funds have been granted approval, more than half a dozen other cases have been submitted and several more are in perspective. The casesunder examination are mostly defined contribution schemes, evenly split between ASSEPs and SEPCAVs. The majority are domestic in scope and dedicated to one company or group of companies. Still, CSSF has noticed that promoters show an increasing interest in international pension funds and multi-employer structures.
Regarding domestic pension funds, Jean-Paul Wictor, first inspector of the Inspection générale de la sécurité sociale (IGSS), head of the supplementary pensions department, confirmed a real interest in defined contribution schemes amongst resident employers. Luxembourg’s favourable current situation, with relatively high legal pensions that provide a reliable safety net for several years to come, allows IGSS to be very flexible regarding the issue of investment risk and make good use of the prudent-man approach. IGSS’ sole requirement will be that the employer has to at least propose a guaranteed compartment (capital or minimal return guarantee) to his less venturesome employees. The attitude of IGSS could, however, change if supplementary pension schemes would have to compensate for the reductions of the legal pensions. In this case, IGSS would plead in favour of minimum return guarantees and defined benefit schemes.
Claude Wirion, from the Commissariat aux Assurances, says that his administration is about to give a favourable notification to one domestic pension fund, while a second file has been entered recently. Furthermore, an increasing number of service providers are seeking approval.
In conclusion, it seems that Luxembourg pension funds are coming off the starting blocks, after both authorities and pension fund industry have completed their learning process. It remains common agreement in the financial market place, that, with its strong experience in investment funds, as well as its modern legislation, Luxembourg will be able to play its role along with the other important financial centres and this in a market which ought to grow considerably over the next years.
Jacques Bofferding is general manager of Banque Générale du Luxembourg’s investment funds and professional banking department, while Michel Duhr is fund engineer in charge of pension funds. Banque Générale du Luxembourg, a major bank in the Grand Duchy of Luxembourg, is a member of the Fortis Group. Banque Générale du Luxembourg is a full member of EFRP representing Luxembourg pending the creation of a national association. As one of the major players on the national market, it is also actively participating in a number of local workgroups to promote the cause of retirement provision at both national and pan-European levels.
1 ASSEP (Association d’épargne-pension): legal form of a non-profit association, where the scheme member is a creditor of the pension fund. It is designed for both defined benefit and defined contribution promises and allows both lump sum and life-long/annuity payments.
2 SEPCAV (Société d’épargne-pension à capital variable): relatively simple legal form (comparable to a SICAV) where the scheme member has the stature of a shareholder. It is solely designed for defined contribution promises and allows only lump sum payments.
3 Minimal capital: ASSEP e5m after 10 years, SEPCAV e1m after two years