The pensions revolution ahead
An important milestone for the Dutch investment industry was reached on March 27, 2006 with the publication by the Ministry of Finance of a resolution relating to Fonds voor Gemene Rekening – Funds for Joint Account – that will allow the Netherlands to take full advantage of new provisions within the Pensions Fund Directive, which came into force last September.
Setting out prudential supervisory rules for funded occupational pension plans across the EU, the Directive, among other things, provides the legal framework for establishing Pan-European Pension Funds (PEPFs) through mutual recognition of pension fund rules and abolition of existing national legal barriers to cross-border provision of financial services across member states.
As such, the concept of ‘passporting’, first introduced for investment funds by the 1993 Investment Services Directive, is extended to cover pension funds. Companies regulated in one member state can now participate in pension funds established and regulated in other EU jurisdictions. In addition, pension funds can appoint investment managers and custodians from any EU country.
Over the past 12 months, much has been written about the benefits of asset pooling, whereby diverse investment products can be managed and administered across multiple domiciles as a single portfolio of assets. Pooling is attractive to multinational corporates, as they would no longer need to maintain multiple pension plans across different jurisdictions, each subject to indigenous regulations and requiring local personnel.
Accordingly, we have seen the emergence of ‘common funds’ – Luxembourg’s Fonds Commun de Placement (FCP) and Ireland’s Common Contractual Fund (CCF) – that allow cross-border assets to be pooled within a single, tax transparent structure. With the launch of the Fund for Joint Account, which promises enhanced efficiency, reduced costs and risk, improved corporate governance and certain tax advantages, the Netherlands is now in a position to compete with those two ‘offshore European’ jurisdictions.
A key element of such pooling vehicles is their tax transparency, which means that it is the pension fund that earns the income generated. And as such, that income is subject to the same tax rules and privileges as apply to the pension fund.
PricewaterhouseCoopers notes that for Dutch tax purposes, transparency of the Fund for Joint Account (FJA) can be achieved in two ways. First, the transfer of participations is made subject to the approval of all other investors. Or, alternatively, transfer of participations is allowed only to the FJA itself. This option allows the FJA to hold redeemed participations available for resale to other investors.
One of the issues with FCPs and CCFs is that they have historically had to be authorised by national regulators on a client-by-client basis, which makes for a lengthy and resource- intensive start--up process. By contrast, the Dutch Ministry of Finance is looking to ease the burden of custodians and their clients by promising to negotiate with other EU member states to assure the FJA’s tax transparent status across Europe.
Looking at the Pension Fund Directive more broadly, the Commission believes it provides a clear opportunity for a radical overhaul of European pensions systems to make them more efficient. Perhaps predictably, however, given the scope of the changes it brings, the Directive has generated no little confusion, not least in respect of how a pension plan qualifies as ‘cross-border’. Robin Ellison, chairman of the National Association of Pension Funds in the UK, has argued that “the directive was intended as a liberalising measure, but eventually turned into a consumer protection law without any of the proper thinking applied”.
Here in the Netherlands, the European Parliamentary Pension Forum – established back in 2003 with the backing of Stichting Pensioenfonds ABP, the Dutch civil service pension plan – has been a vocal critic, raising concerns about both the implementation and interpretation of the new provisions, and pressuring the Commission to make changes.
But it is not all bad news. Enhancing the competitiveness and transparency of workplace pensions is one of the Commission’s a key objectives. ‘Shopping around’ will be encouraged, which should reap rewards in terms of improved fund performance. Indeed, there is already evidence here in the Netherlands that pension funds are attracting companies from other countries.
This leads on to one of the big questions currently exercising the Dutch market, namely whether pension funds should start to be treated as commercial entities and taxed in the same manner as banks and insurance companies.
If pension funds do go down this route – whether pushed or by their own volition – then that will force them to reassess their existing business models and consequently, they might consider outsourcing some in-house functions. They will have to decide what constitutes their core activities, much as asset managers have had to do. Certainly, the biggest pension funds will continue to plough their own furrow and retain most functions in-house, but below a certain volume level, it ceases to make economic sense for pension funds to carry out, for example, investment administration for themselves.