The Channel Islands hold a unique constitutional position in Europe, being neither sovereign states nor colonies or territories. Although not a part of the UK they are possessions of the Crown, to which they owe allegiance as successors to the Duke of Normandy. Furthermore, they do not form a part of the European Union. Although the UK handles foreign affairs for the islands, Jersey and Guernsey are responsible for their own internal affairs, including taxation and company law. Due to this unique situation, and being separate jurisdictions, both islands are of interest to companies or individuals looking to set up an offshore pension.
Both islands have a healthy local economy, and so domestic second pillar schemes have also developed rapidly. Similarly a brief look at first pillar provision confirms that an uncomplicated approach has helped to establish benefits that are the envy of many larger jurisdictions.
The state pension on both islands is broadly similar, with a slight variation in the calculation of benefits. Although payable at a flat rate, state pensions can vary, as contributions are earnings-related up to a ceiling. As of January 2001 the earnings threshold was £329.33p (E521)a month and the upper limit £2,301 a month. Contributions are payable at the rate of 4.5% by employees and 5.4% by employers.
Because of the earnings related element of the contributions, pensions have increased annually more than the cost of living. Pat Merriman, secretary of the Guernsey Association of Pension Funds, says “The aim is that it should increase at a rate somewhere between the increase in the cost of living and the increase in average earnings. Although the Social Insurance Scheme was originally similar to that in the UK, it has now forged ahead. It is a much simpler system and seems to have proved more effective than that in the UK.” This is borne out by figures that confirm that in the 10 years to 2000 the levels of benefits increased by 72% while the cost of living rose by 57%.The system is pay-as-you-go, but there is a ‘buffer fund’ providing partial funding.
As mentioned above, second pillar schemes are widespread. The largest schemes are for employees in the public sector and are fully funded. Other arrangements vary slightly between the islands, but the vast majority are subject to rules imposed under the islands’ income tax legislation (which deal with, for instance, taxation and benefit levels) and personal pension schemes will invariably be provided by entities licensed by the islands’ Financial Services Commissions.
Members of occupational schemes get tax relief on their contributions up to 15% of earnings. There is no limit on employer contributions, except indirectly by way of the limit on benefits, and these too receive tax relief. At present most schemes are defined benefit, but although defined contribution schemes are not widespread, they have been more in evidence of late.
Paul Buckle, pensions specialist at Guernsey lawyers Olsen Ferbrache Morgan, says the tax rules for occupational pensions are similar to the UK rules for ‘section 615 schemes’. He highlights, however, a significant difference between the islands. “In marked contrast to Jersey, Guernsey has introduced ‘preservation legislation’ to protect those with more than five years’ qualifying service, and this is soon to reduce to two years in respect of transfer payments. The rules are broadly similar to those contained in sections 69–82 of the Pensions Schemes Act 1993. In Jersey preservation remains voluntary in the discretion of the employer.”
There are domestic retirement annuity contracts available on both islands. Guernsey residents may also benefit from retirement annuity trust schemes, or RATS, introduced under section 157A(4) of the Guernsey tax law. “The big attraction of these schemes is that there is no need to purchase an insurance company annuity at retirement. Instead the annuity may be paid from the fund,” says Buckle. These schemes are performance-related, and mainly of interest to the wealthier individual.
“There are other types of arrangement which can be found on Jersey and not on Guernsey, namely self-administered retirement annuity arrangements (SARAAS) and small self-administered schemes (SSASS).”
The status of the islands inevitably has attracted participants in the international occupational pensions market. Section 40(o) of the Guernsey tax law and Jersey’s ‘Article 131A Arrangement’ are the relevant parts of the governing legislation. “Under the_former there is an exemption from income tax in respect of income derived from investments or deposits held by a superannuation fund established in Guernsey under irrevocable trusts in connection with ‘the carrying on of business or the exercise of functions wholly or mainly outside Guernsey’. The fund’s main purpose must be the provision of superannuation benefits for persons employed in the business and the scheme must be recognised by employee and employer,” explains Buckle. “These arrangements have particular appeal to multinationals with a worldwide workforce. At the last count there were 184 Section 40(o) schemes approved by the Guernsey Income Tax Authority.”
Buckle points out that multinationals and their employees face many problems where the latter are transferred from jurisdiction to jurisdiction. “To be able to utilise a secure, properly regulated offshore centre, with tax neutrality and adequate, but not over-complicated regulation, and house all worldwide employees under one roof within a desired benefit structure will overcome these issues. These schemes are also very useful as an offshore funded unregulated retirement benefit scheme (FURBS) as there are no benefit limits applicable. They can therefore be used by an employer to provide a top-up arrangement for senior executives who are employed outside of Guernsey.”
There are a number of developments under way in both islands in respect of provision and regulation. As indicated above in Guernsey the Income Tax Authority recently announced a change to the ‘early leaver’ rules by allowing those with two or more years’ service the right to take a transfer payment as from 1 July 2002.
Sex discrimination legislation is soon to be introduced in Guernsey and Jersey may follow. This may include equalisation rules covering direct and indirect discrimination.
“Given Guernsey’s position outside the EU, I understand a view has been reached that there should be no degree of retrospectivity in any discrimination legislation,” says Buckle. He fears this could lead to difficulties in the future. “Both islands are due to introduce human rights legislation in 2002, and this will be clearly cover anti-discrimination. One major significance of this is that the new laws may be argued as a way to introduce retrospective anti-discrimination legislation in the context of pensions.”
Attractive though the Channel Islands are to multinationals and ‘foreign’ employers, Buckle is very aware of competition in other spheres. “In the wake of the Safir case many multi-nationals are considering having one scheme in one EU member state to cover all their employees in all member states. The main problem remains one of tax relief. Some cases, Safir being the most prominent, have sought to change this situation. The potential for pan-European pensions has therefore grown, as has interest in arrangements of this kind. However, even if Safir constitutes a threat to our European pensions market, it will not affect ourworldwide capability.”
Furthermore with Luxembourg and other jurisdictions such as Gibraltar looking to provide for such pensions, will the Channel Islands be affected? Buckle thinks they will. “The section 40(o) and Article 131A schemes and arrangements offer world-wide pension provision, and to that extent Safir has no bearing on them. However, within Europe the role of Channel Island pensions may be reduced were an EU-wide system to be established. In that sense pan-European pensions are a form of competition with the islands that they ignore at their peril.

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