Wilfried Mulder and Hans van Meerten outline the Netherlands' planned new fund vehicle, the PPI
It is likely that the Netherlands will introduce a new pension vehicle soon: the Premium Pension Institution (PPI). In July 2010 the Second Chamber (the lower house) of the Dutch parliament adopted a law that will introduce the PPI in Dutch legislation.
Through the PPI the Netherlands will position itself as an excellent location for the establishment of cross-border operating pension vehicles (institutions for occupational retirement provision, IORPs). Several factors contribute to this:
With the introduction in 2003 of the EU Directive on the activities and the supervision of institutions for occupational retirement provision (the IORP Directive) a first step towards an internal European pension market was made.
We see two trends today. First, multinational companies are increasingly investigating the possibilities of establishing (group) pension vehicles that can operate pension schemes on a cross border basis (also known as pension pooling). This is a new trend, as multinational companies had appeared to be focussed on asset pooling and solutions for expatriates.
A recent feasibility study for the creation of an EU pension fund for researchers confirms this trend. According to the study it is expected that the number (of single-employer) cross-border IORPs will increase significantly over the next 2-3 years once multinationals realise that cross-border IORPs have at last become a practical reality.
Second, several EU member states have used the IORP Directive, to introduce new pension vehicles in order to position themselves as a domicle for internationally operating pension institutions.
Traditional pension funds in the Netherlands have to fulfil several conditions specifically related to the main features of the Dutch pension system, which makes them less equipped to serve as international schemes.
As a result of the introduction of the PPI, the Netherlands will qualify as an attractive location for internationally operating pension institutions - the strong position and tradition of the Dutch pension sector also contributes to this attractiveness. In this respect it is relevant that the Netherlands has historically had a very large and solid pension industry based on a very strong second pillar, with well funded and solid pension institutions. The PPI will enable the Netherlands to effectively export these skills.
Characteristics and advantages
The PPI is a pension vehicle that entirely fits within the framework of the IORP-directive.
A PPI can take the legal form of a public limited company, a private limited company, a foundation or a European company (SE). It is financed on the basis of capital funding - meaning that pay as you go pension schemes can not be operated by a PPI - with its registered office in the Netherlands. Furthermore, the PPI can also be established independent of any sponsoring company or business sector.
A PPI can operate plans that qualify as pension schemes in the social and labour law of the countries in which these schemes have been agreed. As a result, the pension benefits accumulated in a PPI can eventually - depending on the regulations applicable in the country involved - take various forms: a (temporary) periodic benefit, a lump sum benefit or a benefit for life.
In addition, a PPI can deliver the broad range of pension services, although it is not permitted to cover any insurance risks (eg, biometric risks). As a result, the financial obligations of a PPI consist of the payment to participants of the accumulated pension capital. If a pension scheme obligatory must provide for a benefit for life, the obligation of a PPI will consist of a transfer of the accrued pension capital to an insurance company or another pension fund as the PPI is not allowed to cover insurance risks. In such a situation, for example in the case of a Dutch pension scheme, a PPI will only be able to operate the accumulation phase. The payment phase of the pension benefits will be exercised by the insurance company involved.
However, the PPI is allowed to operate schemes entailing guarantees offered by the employer and/or by means of the investment portfolio - for example, whereby a certain investment return is realised.
A major advantage of the aforementioned limitation of the scope of a PPI is that many requirements of the (Dutch) supervisory legislation do not need to be met. For instance, a PPI does not need to fulfil a number of prudential rules (supervised by the Dutch Central Bank) that are applicable to a common Dutch pension fund, such as the obligation to maintain technical provisions and to meet solvency requirements. Also, no potential recovery plans apply. Thanks to this, a PPI can be set up as a simple, efficient and (as a result) cost attractive vehicle .
Finally, the PPI has a competitive tax regime: an exemption from corporate income tax is applicable and, due to its qualification as a resident for tax purposes, a PPI will be able to claim the advantages of the (internationally competitive) Dutch tax treaty network for income and capital gains on its cross border investments.
Owing to these factors, we believe, a PPI can be considered perfectly suitable for the operation of DC-pension schemes and the servicing of the international pension market.
Through the adoption of the PPI, the Netherlands has taken an important step in positioning itself as an internationally attractive and competitive location for operating cross border pension schemes of a DC-type. We hope that the Senate will also approve the PPI during its forthcoming session and that the PPI can enter into force.
The PPI will not be the only measure of the Dutch government in promoting the Netherlands as an attractive location for IORPs. The next step will be the creation of the Algemene Pensioeninstelling (API).
The API will be a vehicle that can also operate international defined benefit (DB) and hybrid pension schemes. Once the API has been introduced in Dutch legislation it will operate all types of pension schemes (DB, hybrid, DC) on a cross border basis through a Dutch IORP.
In the context of recent parliamentary discussions with regard to the PPI, the Dutch government has once again has expressed its intention to introduce the API and has announced a timetable for legislation to achieve this.
In addition, the European Commission recently published a green paper on the future of pensions in the European Union. In this green paper the Commission expresses its views on the functioning of the internal market for pensions and the potential role for cross border vehicles in this respect.
A main concern of the EU is how to improve the internal market for occupational pension funds and how to remove obstacles for cross border activity of IORPs. Removal of such obstacles will facilitate cross-border activity and will be beneficial for the Netherlands as an internationally attractive location for such IORPs.
Wilfried Mulder is senior policy adviser at APG and Hans van Meerten is a lawyer at Holland Financial Centre