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Small country, big idea

As demonstrated by its rise to become the world’s second largest investment fund centre, Luxembourg has proved itself a canny operator and often one step ahead of its European counterparts. With the creation of the so-called ASSEP (Association d’Epargne Pension) and SEPCAV (Société d’Epargne Pension), there’s a distinct feeling history is repeating itself. The EC’s draft directive on supplementary pensions, published at the end of last year, is far from perfect but it suggests genuine pan-European pension funds are inevitable. And, just as Luxembourg prepared itself for the investment funds directive, so it has done the same for pension funds. Once there is an EC directive on supplementary pensions that tackles the tax issue or once there is a successful test case at the European Court of Justice, the Luxembourg pension market will take off.
Says Christophe Girondel, senior consultant at Deloitte Consulting: “The market is going to grow like crazy because of the need for pan-European, multinational pension funds.” Driving this are more mergers on the continent, creating groups that can genuinely call themselves European. These new entities need something pan-European, as greater numbers of employees are becoming more mobile. Employees have also become wiser and more savvy about supplementing their state pensions with private and occupational schemes.
According to Lucien Thiel, general manager at ABBL, the Luxembourg Bankers’ Association, the idea of the 1999 legislation is a direct attempt to turn the country into a major pension centre, a notion based on two assumptions. Luxembourg became an offshore centre in the 1980s (initially servicing West Germany) thanks to the lack of a level playing field. This is changing rapidly. “The prospect of monetary union obliged us to think about new strategies and new products,” he says. “It was thought that pension funds would be an interesting product because the market is there – in the catchment area, the area surrounding Luxembourg.”
Thiel expands the theory by saying Europe is reaching a crunch on state pension provisions and that those countries lacking supplementary schemes will soon have to act. It just happens that Belgium, France, Germany and Italy all have highly developed pay-as-you-go systems and are near Luxembourg. Having pinpointed the market, the government set about constructing the new schemes. That they are highly flexible is intentional. “If you want to serve several countries you must have a very broad and open approach,” says Thiel. The idea behind the new pensions legislation is to provide a broad framework around which those wanting to establish a fund can work Says Fernand Grulms, founder of pensions consultant Pecoma: “The Luxembourg legislature and politicians took the view ‘let’s provide the market with all the possible tools in this area and then the market has to see how it can use these tools’.”
What the Luxembourg legislature has done is pass the decision-making on to the CSSF. A promoter can appoint the board of an ASSEP or SEPCAV, select the contribution or benefit level, lay out an investment structure and submit it to the CSSF, which will then judge it on a case-by-case basis. Says Grulms: “The idea is to give a general framework where a potential promoter of a pension fund can come with his own ideas, choose this flexible tool and then promote it back to his own market and cross-border.”
Luxembourg’s Commissariat aux Assurances (CAA) has also launched a Grand Ducal decree allowing insurance companies to promote pensions. James Ball, founder of JBI Associates, is translating the legislation for the CAA and he says it appears to have done a thorough job. It was only passed at the end of last August, so understandably there are no established schemes yet. Most in Luxembourg agree the system is yet another valid product to offer and it is only a matter of time before some promoter sets up a new scheme under the auspices of the CAA.
Similarities and nuances between the new vehicles are covered in a separate article on page 4. In short, the ASSEP is an association of people entitled to a pension on retirement, in a SEPCAV the members are in effect shareholders. Whereas the SEPCAV is a solely a defined contribution vehicle, the ASSEP and the new insurance pensions can be both defined benefit and defined contribution. Uptake on the two vehicles has been relatively slow but this is to be expected. Talk to anyone in Luxembourg about this and they remind you how long it took the investment fund industry to get off the ground.
There are indications that the bankers‚ funds (ASSEPs and SEPCAVs, thanks to the ABBL sponsorship) are beginning to catch on. Last June Anglo-Dutch group Unilever set up the country’s first ASSEP for its expatriates and, towards the end of last year, Alliance, the Dubai-based insurance company, set up the country’s first SEPCAV for residents in the United Arab Emirates. The Alliance pension fund is profiled in detail on page 7, but the fact it will eventually be geared for many of the Middle Eastern markets and that Barnett Waddingham, the consultant responsible for setting up the fund, intends to take the ASSEP and SEPCAV concept to Eastern Europe, is testimony to the new vehicles’ flexibility. Just before IPE went to press, Lombard International announced it had set up a SEPCAV for KPMG, the accountancy group. Geoffrey Furlonger, the brains behind the project and an expert on the Luxembourg scene, was one of the participants at the roundtable featured on page 14.
To the cynical, these probably appear little more than niche schemes. Taken in perspective though, they are a good omen and a bold adaptation of the 1999 legislation. Says Thiel: “We will probably have a single market in the foreseeable time but in the meantime, even if you are hampered by the lack of a single market you can warm up by offering products to a very restricted but rather interesting clientele and these are the multinationals and their expatriates. We really have the feeling that it starts now.” Referring to pension fund reform in Germany, he adds: “Of course, the big bang will happen with the single market and one must not forget we will get a big help from the German side.”
And Thiel is probably right. What the three different approaches to using the new pension schemes do nicely is demonstrate their versatility. This flexibility was intentional and, in terms of expatriate pensions and providing an ideal vehicle for multinationals, Luxembourg is now head-to-head with other offshore jurisdictions – Jersey, Guernsey, Switzerland and Bermuda, to name a few.
Each jurisdiction has its own attributes but it appears Luxembourg has many. Given time it will iron out existing problems and the new legislation has given it the chance to surpass the Channel Islands as a pensions centre. This is not to denigrate the latter, rather it’s that Luxembourg has numerous advantages. First, geographically, it’s on the continent and in the EU. And although it’s a hackneyed example, language skills of the average Luxemburger are superb. Finding employees in London with four languages is almost unheard-of; in Luxembourg it’s nothing special. Then there’s its reputation as a financial centre. The investment fund industry means the country already has a wealth of financial institutions present. Luxembourg’s administrative capabilities are an essential part of the jigsaw and Deloitte’s Girondel believes it can provide better services than a lot of other centres.
Another legacy of the investment funds is dozens of double tax agreements, a useful proxy for an EC directive on cross-border taxation. And, for example, when Luxembourg signed its latest double tax agreement with Canada, ASSEPs and SEPCAVs were specifically mentioned. Luxembourg’s regulatory authorities also have a reputation for being stringent but fair. The government also has a reputation for being flexible and extremely efficient at passing legislation it feels will help the country’s standing as a financial sector. “This is one of the major advantages of Luxembourg that our politicians are very much business-minded,” says Grulms.
Where Luxembourg has perhaps been negligent is in the promotion of this highly marketable product. “We really have to point out this pension fund because it is a really interesting model and one with a purely transparent motivation,” says Phillipe Leonard, director of ABN Amro Life & Pensions. There are numerous theories as to why Luxembourg has not publicised itself that well. One is that the country is simply less aggressive than others in self-promotion. Another is that it didn’t feel the need, as many potential clients were neighbours and would assimilate the products and their minutiae by osmosis. Others feel there is a little friction between the bankers’ pension funds and the insurance vehicles, the latter coming over a year after the former. Hence the lack of any concerted, centralised marketing campaign. As one local pensions expert says: “In a perfect world it would have been better to have both of them at the same time.”
What is now more important is that those involved with pension schemes realise this and are doing something about it. “The government and the industry have done an excellent job but now we need to move on to the next stage,” says Ikram Shakir, managing director of Barnett Waddingham. And rightly so, as Luxembourg has put together a great product and demographics in the EC suggest its timing might be perfect. At the moment, 88% of retirement provision comes from the state but this is set to fall to 66% over the next 30 years. According to ABN Amro’s Léonard most of this shortfall is likely to come from second pillar schemes.
It’s difficult to estimate what this will be in cash terms but some put the figure as high as E12trn by 2015. Even if the Luxembourg pension fund market doesn’t take off to the same extent as the investment funds, such is the magnitude of the pie that even a modest share will reap rich rewards.
The schemes, however, are a shade off perfection At the moment the Luxembourg is making minor adjustments to the initial legislation. These are documented on age 7 by Jacques Elvinger, from one of the law firms involved in drafting the initial legislation. That the legislation is back in parliament isn’t due to any catastrophic shortcomings, the changes are relatively straightforward. Instead it is testimony to the legislature’s flexibility. Then there’s the small matter of charges, something yet to be addressed. At the moment with so many parties involved, the new funds are rather expensive as there is no fixed rate and each service provider to the fund is able to set their price.
According to Shakir, there’s the question of disclosure. At present, if employers want to set up either an ASSEP or a SEPCAV, they have to publish the scheme rules and this means disclosing their contributions. Corporate structures within the schemes have yet to be established but both of these matters are either being looked at by the government or the CSSF.
The legislation is now having a follow on effect with new pension fund groups and products springing up. Sohail Jaffer and Frank Bursing last year set up a new asset management group, Premium Select, one of the first to be based in Luxembourg. The group specialises in multi-manager services and has already secured its first institutional mandate, a E100m contract with a life company. Bursing, joint managing director with Jaffer, hopes the group will benefit from some of the funds that will be set aside for pension provision in Germany. “We feel we have a competitive advantage by offering multi-manager structures for this new pension fund business,” he says.
And Grulms, formerly chief economist at the ABBL has set up Pecoma, a consultants dedicated to pensions. Grulms is launching Luxpension, a multi-employer pension fund under an umbrella ASSEP. “For the moment we are concentrating on the Luxembourg market but we’re also looking at opportunities on the international market.” In particular, Pecoma is following developments in Germany very closely. “We also have a few Luxembourg financial service providers who are seeking our know how to see if one could set up Luxembourg products and provide these products into the German market once the new pension reform enters into force,” he says
Grulms says these clients are predominantly German-owned looking at which products they can export back home. Germany’s financial authorities have produced list of products eligible for use in the German pension funds. At moment, life insurance products are eligible, but whether the new pension products are is less clear. Says Grulms: “The question is, what about pension funds? For the moment pension funds are limited to those under German jurisdiction and this is probably a discrimination against foreign providers. This is a point we are working on to see what possibilities there could be in this area and to what extent the Luxembourg ASSEP is similar to the German concept of a Pensionskasse.” Grulms says if they can prove it is really the same they might have a case that Germany should also accept ASSEPs to the same extent as the German Pensionskassen.
All of which is extremely encouraging. As mentioned, there are problems, none more acute than taxation. There are a number of approaches that will solve this – one is a full- blown EC directive (remember though that the latest supplementary pensions directive took 10 years); a second alternative is a test case at the ECJ while a third is some kind of agreement on double tax agreements between the member states. “We’re going nowhere on a European perspective until the tax issue is sorted out,” says JBI’s Ball.
Taxation will be inevitably sorted, just as there will undoubtedly be a fuller directive on supplementary pensions. As with Luxembourg’s innovative insurance funds legislation, the country’s authorities have done it again, put in place a flexible system that although slightly faulty, is ahead of its European counterparts. All Luxembourg has to do is market it better and wait for the dividends.
Says ABBL’s Thiel: “The time has come when we must now give a priority to the promotion of pension funds. Until now it was too early to do so because the operators were not prepared. Now I am convinced enough players are prepared that we can start it and although we are still awaiting the opening of the market, this is a question of months, it’s no more a question of years.”

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