A tale of two jurisdictions
Expatriate pensions are still an offshore game, and Luxembourg and Liechtenstein are vying for supremacy, writes Gail Moss
Despite – or perhaps, because of – the global financial crisis, multi-national companies are vying more than ever to recruit the best people for senior positions. The benefits package is a key weapon in the battle.
“Historically, companies were offering attractive expatriate expense allowances to attract talent and encourage key management to move to different locations,” says Jana Mercereau, senior international benefit consultant, Towers Watson. “Now, given the global financial crisis, it is pension plans which are a must-have to play the game.”
However, while a major consideration will be the size of employer contributions, an equally important issue will be to ensure that employees who move from country to country are not disadvantaged, compared with their position had they stayed at home.
But as cross-border pension plans within the EU still struggle to establish themselves, with only around 80 in existence, two offshore players – Luxembourg and Liechtenstein – are slugging it out with their bigger competitors to provide a base for multinational pension plans.
“What’s driving the offshore market is the need to make plans comparable with what is offered employees in established pension markets,” says Mercereau. And while pension plan design for a specific country is driven by pensions and tax legislation in that country, offshore plans enjoy more flexibility.
“In particular, top providers are offering open architecture products where plan members can choose from a universe of funds and benefit from institutional rates, as well as flexibility around contributions,” she continues.
Both Luxembourg and Liechtenstein have their benefits and drawbacks.
The EU option
Luxembourg, as a well-established financial centre, benefits from good providers, experienced personnel and a benign legal and tax environment.
As an EU member state, it can offer employers not only an Institution for Occupational Provision (IORP), but also trust- and contract-based schemes.
The latter types of scheme offer the ability to outsource the administration function, including adding new members and paying out benefits. Few providers at present, however, can administer an IORP.
Crucially, contract-based schemes can be set up on an individual basis, so a member’s plan can move with them if they change company.
It was largely for security and investment reasons that Aegon based its insurance-backed International Pension Plan – aimed mainly at global companies wherever they are based, with employees located all over the globe – in the Grand Duchy.
“Luxembourg is a European financial centre, so it has strong financial regulation and consumer protection,” says Mark Green, DC product manager, Aegon Global Pensions.
“As a small country with a focus on finance, it’s very important to Luxembourg to retain its position. So there’s a great incentive to maintain strong controls which offer investors, such as the sponsoring employers of expatriate pension plans, peace of mind about the money they choose to locate there.”
The Luxembourg life and pensions industry is tightly regulated by the Commissariat aux Assurances (Insurance Commission), which requires a quarterly external audit on all insurance companies.
The tripartite agreement between Commissariat, insurance company and custodian, with additional supervision and intervention mechanisms, gives the Commissariat powers to intervene to protect the interests of policyholders should it decide this is necessary.
“The potential for insurance company insolvencies is always a concern to companies wishing to establish a retirement plan,” says Mark Price, principal in the, international consulting group at Mercer. “The tripartite arrangement and other supervision mechanisms from the CAA helps with risk mitigation.”
Data protection laws are also administered more rigorously than elsewhere in the EU. But this can be a double-edged sword. “While our clients appreciate the strong controls we put in place to comply with these confidentiality requirements, they also need us to provide management information to help the governance of their pension plans,” says Green. “The procedures we have developed in collaboration with the regulators can make it easier for those employers to access management information, but the rules can also make some things more difficult. For example, when corresponding with the employer we have to use unique identifying numbers rather than members’ names.”
“Though there are strict rules around data protection, Luxembourg is governed by a light-touch approach,” says Mercereau. “There is no requirement to make tax filings, whereas typical onshore plans need regulatory approval to obtain tax benefits from the legislators.”
Luxembourg’s insurance framework is built around the French model, so Aegon’s investment range is structured to give access to French capital guaranteed funds as well as external fund links. The funds offer capital guarantees with an annual ratchet, so interest, once it is added each year, cannot be taken away.
The plan is tax-neutral, so employers’ contributions are tax-deductible. There is no withholding tax on investment income, and no Luxembourg tax on payouts.
Generally speaking, there are no tax breaks on offshore pension scheme contributions. And whether a member pays tax on benefits depends on their citizenship and where they are living when they retire.
“For many employees not subject to worldwide taxation (by citizenship or residency) such as Middle Eastern nationals, the total amount in the fund could be tax-free,” says Mercereau. “At the other extreme, offshore pension plan members who are US citizens or residents are taxed at every stage, so these plans are not for anyone with a US tax filing requirement.”
In terms of IORPs, Luxembourg does boast advantages over some other European domiciles. Like Belgium, it absorbed the IORP mindset, changing its domestic vehicles to reflect the cross-border framework, rather than simply tacking on changes to the existing structure, as did some other jurisdictions. Furthermore, both domestic pension funds and IORPs include social representation and scrutiny of compliance with social and labour law.
Luxembourg IORPs are also more flexible than many cross-border plans based in other countries, with the ability to ring-fence different sections if they wish; this means both DB and DC sections can be included in the same plan. This is not unique – Belgium’s Organisation for Financing Pensions (OFP) also possesses these features.
And the funding requirements for DB schemes are less stringent than for say, the Netherlands, UK or Ireland.
But one potential drawback is that Luxembourg has three cross-border vehicles. Besides the main structure – the Pension Saving Association (ASSEP) – there is also the pensions savings company with Variable capital (SEPCAV) and the CAA. This adds an extra level of complication.
And while Luxembourg is an established financial centre, its expertise has in the past related more to asset management than pensions, although this has shifted somewhat in recent years, with the entry of pension specialists like Aegon into the market.
Handicapped by non-EU membership?
In spite of its status as a base for international organizations, and its pool of expertise in the pensions arena, Switzerland has not become a natural domicile for international pension schemes. This is because it has no framework for such schemes, and because it is not in the EU.
However, non-membership of the EU has been no handicap for its smaller neighbour Liechtenstein, a popular offshore centre with a specific framework for cross-border schemes. As at 1 June 2012, there were four IORPs in existence, only one fewer than in Luxembourg, according to EIOPA’s Report on Market Developments. There were also a number of offshore funds based in the principality.
Crucially, Liechtenstein, unlike Switzerland, is a member of the European Economic Area (EEA) so can act as a gateway for Swiss companies to the EU and EEA. Conversely, it also enjoys privileged access to the Swiss economic area, thanks to customs and monetary union with its neighbour.
There are still public perceptions of Liechtenstein as a haven of extreme secrecy, and which encourages tax avoidance.
But the principality has a strong system of financial market supervision, compatible with EU rules.
Occupational pension funds are set up under the Pension Funds Act and Pension Funds Ordinance, and Liechtenstein has published the relevant social and labour laws that a cross-border IORP must comply with, while providers are regulated by the Financial Market Authority.
“There are no reasons why Liechtenstein should be excluded as a domicile,” says Price.
“Many decisions about jurisdictions for offshore pension plans are made according to the
wavailability of vehicles and providers, rather than location. Many companies are looking for a bundled offering of administration, investment and legal services in respect of an offshore pension plan and there are a number of well-known providers offering this in a number of domiciles.”
And offshore plans can also sometimes be run as savings, rather than retirement, vehicles, which yields additional flexibility.
“For example, where a member leaves the company or for some reason becomes ineligible for plan membership, their assets don’t have to stay within the plan,” says Price. “Instead, they can be cashed out, or transferred into an individual plan, which means the employer does not have to keep the individual in the plan.”