Roundtable: The beginning of the future (part 2)
Fabi We have seen some resistance in France towards an open market in pension fund business as a consequence of Euroland, because they wanted to have a structure for shareholders in France for the independence of their companies. That was one of their main political reasons, now if they agree to freer investment policies for pension fund business, then it is of no importance where the management is done, whether in Paris or Luxembourg, so that takes out the pressure off the investment side. Also, from also a political point of view, the social competence always stays within the country of the employer so on this point the political aspect is not an issue.
Jaffer I have one question for the regulators. If under the investment objectives of a pension scheme it is allowed by the sponsors to invest a small portion of the monies into private equity, venture capital and certain specific types of equity hedge funds would there be an issue from a regulatory standpoint to get approval for such investments?
Wirion For the pension funds coming under the supervision of the insurance supervisor, the overall investment strategy has to be approved so, if an investment manager plans to invest in these kinds of assets, this has to be stated either when the business plan is presented during the licensing procedure or when the investment strategy undergoes a modification. We would expect to find some quantitative limitations in the business plan, which could limit the investments to 5% or 10%. What we do not want to do is to approve a specific hedge fund. We will approve a general approach and it will be up to the investment manager to stick to the limitations imposed by the general strategy. In case of problems these would have to be discussed together with the pension plan sponsor or his representative and the fund manager.
Jaffer Well that is a pretty enlightened approach. The flexibility on your part actually enables some of these pension funds to design suitable programmes for their beneficiaries and members.
Martins What is refreshing about the Luxembourg scene is its flexibility. You really have to create a lot of it yourself, which is good. Some guidance and rules make sense, but I think the flexibility of setting your investment rules and also your fund rules, to be able to create something that is tailored to your needs is a big attraction.
But I would comment that, in terms of management of the vehicle, there is a lot of emphasis on who is in charge of the fund or who is managing it, having representatives from the members and qualified people. So I think the emphasis here is having the confidence to be able to do something to make sure it meets its needs. Flexibility and not legislating exactly what the fund should look like is the approach. Here is a framework to create what you want, but then the professionals and the regulators are going to monitor implementation.
IPE Luxembourg has always taken a long term view. How did the pensions legislation get started?
Furlonger The Luxembourg Bankers Association had quite a big role in developing the pensions legislation. In fact I believe they asked consultants Mercer for a feasibility study on possible legislation several years ago.
Martins I think that was the first time we saw a lot of activity. What was good was that they took the time to talk to a lot of people. It is a good example of trying to create something that was flexible. This has been reflected in the pension vehicles that have been set up already, as they have been designed to meet the particular needs of the sponsoring organisation. We are looking at more niche areas at the moment and that is going to be the situation for the next few years.
Rommes The flexibility in the pensions law comes from the fact that, when we were looking at pension funds in different countries, we noticed that there was no definition of what a pension fund was. It really does not exist even today. If you look at the title of the EC’s proposal for the directive, it does not use the term pension fund. So, it was very obvious that if we wanted to have a product in the Luxembourg law that was to be flexible enough to exist for different foreign laws, it had to be very flexible in every respect. Also, the concept had to be able to promise very different things and that is why the law is the way it is, made for different legislations abroad. Had it been possible to do it only for Luxembourg purposes, it would have been much easier to draft. But we were looking for a broad approach necessitating being flexible by absolute technical need.
IPE Where does this put Luxembourg in relation to other jurisdictions? It seems to have a head start in this area in Europe. But in addition to the strengths that Luxembourg has, are there any weaknesses that the panel sees which need addressing? We understand the new pensions law is being revised already.
Campill The draft law amending the original has been deposited which brings more clarification, but nothing that concerns the overall philosophy at all. There are a lot specifics concerning the role of the liability manager and the rest covers a number of practical points.
Furlonger These laws give Luxembourg a head start in the sense that they are all the legislation that is in place internationally and Luxembourg is the first to do this on a cross-border basis. There are already existing jurisdictions which are attractive for cross-border pensions, such as the Channel Islands, but you could argue that, in a certain way there isn’t legislation there. One UK multinational I was explaining the Luxembourg law to and they said ‘It’s like a Guernsey trust but more regulated’. That may be an ignorant view but it is the perception
Rommes It is true that every regulation has a strength and a weakness at the same time. What everybody has told us from the beginning is that you have to have adequate supervision and adequate control over the vehicle. If you don’t have that, then you do not have any credibility. The opportunity to do something completely “offshore” from the legal point of view, might be completely free of restrictions, but that is not what we wanted to have. What we wanted to have is exactly what we have today, which is very close to what the proposal for the directive looks like now. It means something that has substance, that has control and gives some guarantees regarding flexibility. However, only having flexibility without security- that would essentially be a real weakness and one that we didn’t want to have.
Furlonger I doubt that a totally unregulated pension regime is going to be accepted by other EU member states, therefore as Europe moves towards mutual recognition of pension regimes for tax and other purposes, I doubt that EU member states will recognise Jersey and Guernsey for purposes of equivalent tax treatment. Luxembourg has therefore been very sensible in designing legislation to comply with the EU directive and which would be difficult for other EU member states not to recognise for tax and other purposes.
Bofferding Where there are corporate sponsors, they have to be sure the assets for their employees’ benefit are in a very safe place. That is one of the key selling aspects, I would even put that in front of all the other elements. Without security it wouldn’t work, at all.
Martins Dublin is referred to as an obvious competitor and, in many ways, it is. But after talking to people in the market, I notice more players looking at what opportunities Luxembourg offers in relation to the target market. I certainly don’t get the feeling that Luxembourg people are looking at Dublin or other jurisdictions and saying “We’re missing out or they are strong competitors or whatever”. The question is rather where we can go and what can we do with what we have?
IPE Where is this going to take Luxembourg over the next five to 10 years?
Jaffer From a European perspective, I think the first question is if the promoter is looking for distribution into the European market then Luxembourg definitely is the better location both psychologically and in terms of comfort, safety and languages. I think that what one has to ask is not so much what are the benefits between Luxembourg/Dublin but what are your aims as to where you really want to go and who is your target market. I mean there are still issues with Dublin, as we know, regarding Southern European jurisdictions like Spain. I think that Luxembourg is probably better received if your target market is Europe.
Martins We have enough tools now to keep us at the forefront and that is the role I see for Luxembourg fulfiling and continuing to do so well. Changes there will be over time but it is by specialising in wealth management and pushing the frontiers outwards, which make the prospects look extremely good in the long run. This is despite the few scare-mongers about withholding tax and secrecy which I don’t see as a long term threat to Luxembourg. I really do think we have enough opportunities here to overcome such issues - history has proved that.
Jaffer The spirit of pioneering innovation that Luxembourg has shown with this new legislation means we are going to see a great opportunity for asset managers and for the insurance business. But it is going to be an evolution instead of a revolution. I don’t think we are going to have a huge flow of assets coming into the new vehicles, but I think over time there will be a fair amount of activity. You have to be cautious and not be overly optimistic about the developments so a balanced view would be a good thing. Let us make it work; let us make it happen.
Fabi I believe that these new rules provide very good opportunities because they are very flexible. For asset managers, it is a real opportunity to study them and to see what they can do.
Bofferding Having participated for many months now, in the development of the pension fund market here, I must say I am really pleased in that, not only have there been visionaries over the months and years, but also many consultants, lawyers and other service providers put in a lot of effort and now we are in business. The first clients have also been, to a certain extent, visionaries and it is thanks to them we can communicate our first successes. This gives us the visibility . If we have a weakness in the Luxembourg community it is the low profile that we like to take.
Rommes We have the professionals to design it, we have the professionals to make it work and we can see that even now before we have a really big market here. We do not expect an explosion of business, but I see this as an example of what is possible in Luxembourg and that makes me optimistic in the long term.
Wirion Supervisors and the industry share the same views as to the promising future offered by pension funds. This is not something that happens all the time. I am quite confident about the future of Luxembourg in this field.
Furlonger The long term prospects for pensions in Luxembourg are very good. For the moment, I suspect that the opportunities will be restricted to niches until there is more progress on the tax front in Europe. In the near future there will be a trickle of business which hopefully will turn into a torrent in the not too distant future.