Who’s ahead in the race for cross-border pension assets? Gail Moss reports on factors behind the choice of domicile
Once the grand vision of pensions professionals and the inspiration behind the IORP Directive, pan-European pension funds remain just that: a vision yet to be realised.
However, the concept of cross-border pension funds - IORPs with a domicile in one country servicing members in another - is gaining impetus after several years with low levels of interest.
At least several European countries are now marketing themselves as the domicile of choice for sponsoring companies wishing to set up a cross-border fund that goes beyond the ability of a custodian to pool assets virtually so they can be managed at lower cost.
Belgium, Luxembourg, the Netherlands, Ireland and to some extent the UK are all offering versions of cross-border vehicles.
The clear frontrunner is Belgium, the domicile for more true cross-border schemes than anywhere else - ten at the last count - including BP, Chevron, Pfizer and Nestlé. More are planned, including one for the French pension provider UMR Corem.
The latest international pension survey from Achmea Pensions International confirms this: “Belgium is favoured for its low costs and more flexible funding regulations,” it says. “Instead of rigid, quantitative rules, Belgium applies a more flexible, qualitative framework. Buffers that are not needed any more may ultimately flow back to the sponsor, which is of course an advantage for companies who have a high internal rate of return.”
In contrast, the Dutch PPI cross-border vehicle has been adopted by around ten schemes, these are only for Dutch employees.
Of course, the choice of domicile for a pan-European scheme also depends on the sponsor company’s specific situation.
“A US-based multinational company may choose Ireland because that’s where its European base is,” says Aaron Overy, head of asset pooling development, Northern Trust. “Or a company providing financial services, such as treasury centres, may decide to use Luxembourg.”
However, a significant factor will be the pensions framework in each country.
One of the most compelling reasons to base a multinational pension scheme in Belgium is that its Organisation for Financing Pensions (OFP) cross-border vehicle is now also the country’s standard company pension vehicle.
Following the enactment of the IORP Directive in 2003, Belgium’s pension associations have been converted to the OFP structure, even where all their members are based in Belgium.
“Both Belgium and Luxembourg changed their pension vehicles to reflect the Directive, whereas Ireland, for instance, just tacked on the necessary changes to its existing trust vehicle,” says Paul Kelly, director, international consulting, Towers Watson.
He says most big multinational corporations have a Belgian subsidiary, which will have a pension scheme in the form of an OFP: “This can then be used as the basis for a cross-border scheme, because it is relatively easy to add on further country sections as necessary.”
There are other structural advantages to the Belgian OFP and to some extent, the Luxembourg equivalent, the Pension Saving Association (ASSEP).
Belgian pension funds include social committees reporting to the pension fund boards which check compliance and social and labour law, while there is a similar set-up in Luxembourg.
“It is not so easy to use an Irish fund because there is member representation on the pension board itself,” says Kelly. “This is more direct than working through a social committee, and can complicate the work of the board.”
The point is echoed in Achmea’s survey, which points out the possibility to appoint a board purely comprising professionals. Employees can participate through a social committee for each country’s section within the fund.
Kelly says that in Ireland it is impossible to ring-fence different sections of a scheme.
“If, for example, there are both DB and DC sections in a fund, and the scheme is closed, the DC members could see their benefits reduced, while DB members may be unaffected,” he says. “This inequality makes it difficult to include a DB fund within a multinational plan in Ireland.”
In contrast, plans set up in Belgium and Luxembourg are more flexible, 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.
In spite of Belgium’s pre-eminence, Overy considers Luxembourg to be the unsung hero of cross-border schemes. “It has not promoted the ASSEP very widely but Luxembourg benefits from good providers, experienced personnel and a benign legal and tax environment,” he says.
One potential drawback is that Luxembourg has three cross-border vehicles, the others being the pensions savings company with Vvariable capital (SEPCAV) and the CAA. This adds an extra level of complication.
Kelly points out that Luxembourg is so small that global corporations are unlikely to have an existing subsidiary there. “Using it as a domicile for a cross-border pension scheme would mean setting up a new plan there,” he says.
The Achmea survey spots another drawback in that Luxembourg’s financial industry is focused more on asset management than pensions. However, it says Luxembourg and Belgium have less stringent funding rules than the Netherlands and UK. The funding requirements for Irish DB schemes are also relatively high.
“Typically, you have to put up less capital to create a scheme in Belgium or Luxembourg,” agrees Kelly. “It’s not the driver for going there, but it is a marginal influence. The driver is being able to set up plans more efficiently.”
Meanwhile, the Dutch PPI has not yet been used for a true cross-border scheme. However, Arjan van der Linden, investment consultant, Aon Hewitt, sees a dynamism in the Dutch market which could attract new customers.
“Nearly all the insurers who are active in the DC space are also involved in PPIs,” he says. “But there is not much difference between the traditional DC plans and PPIs of some insurers - you see exactly the same investment funds and fee levels from both types of plan.”
In contrast, says Van der Linden, new players with exotic names such as Brand New Day and Be Frank are targeting the insurance establishment by setting up PPIs that appear fresh and exciting. These are better equipped to comply with the new market environment, where flexibility and transparency are what people are looking for, he says.
“Furthermore, new companies tend to build systems from scratch,” he says. “This means they don’t have the legacy of admin systems which are costly, and find it more difficult to react to market conditions. One consequence is that they can charge low fees to plan participants. However, they still have to prove themselves.”
In any case, he says asset management fees in the Netherlands are much lower than for surrounding countries. This could be a driver helping to market PPIs internationally.
But the benefits within the Netherlands are also cultural, says Van der Linden.
“Insurers can sometimes be inflexible,” he says, “But companies in the IT and telecoms industries like to do things a particular way, such as supplying information over the internet, and some insurers aren’t up to that. That’s where you see new PPIs emerge and grab part of the market.”
However, he says that most of the action has been in home-grown plans. “It’s easier to get clients transferring from traditional DC plans than getting in truly international companies,” he says. “You also need to have local knowledge of pensions regulation in other countries. Belgium’s DB and DC specialists have been more internationally orientated.”
And he also points out one disadvantage of PPIs: “They are a very basic form of capital accumulation plan. They are not allowed to include any insurance, say, for disability. So that has to be added on if the employer wishes to offer a complete pension arrangement. On the other hand, it does mean employers have flexibility.”
All this means that Belgium is now enjoying a virtuous circle - its popularity as a domicile for cross-border schemes means it is acquiring a greater depth of experience than its competitors.
“Belgium has become popular because it has energetically promoted its status as a domicile for cross-border pension schemes,” says Overy. “The pensions regulator has been enthusiastic, and rather than being subject to prescriptive rules, pension funds are allowed to follow the prudent person principle. Other locations are still to catch up.”