Vying for supremacy
Offshore jurisdictions - such as Jersey, Guernsey, Isle of Man, Ireland, Luxembourg, Malta and Gibraltar - can provide pension schemes to Europe's mobile employees. But as the spotlight moves on to pan-European solutions what exactly do they have to offer to Europe's international employers?
Offshore centres pride themselves on offering a regulatory framework with a lot more flexibility than other European jurisdictions.
In the Isle of Man, the Retirement Benefits Schemes Regulations 2001, which came into effect in early January 2002, created a framework that enabled the island's government to establish international retirement benefits schemes and cater for non-resident members or individuals.
Prior to this, in October 2000, the Retirements Benefits Schemes Act 2000 (RBSA 2000) introduced a broad pension framework that applies to all schemes operating in and from the Isle of Man.
The Isle of Man's Insurance and Pensions Authority (IPA) developed market-specific legislation by creating separate international and domestic regulations under RBSA 2000 after recognising that different considerations applied to domestic and international pensions markets.
Mike Lightfoot, pensions project executive at the IPA, says: "Our legislation is largely about member protection - which we effectively didn't have before 2002 - and their legal rights. In an international scheme we don't insist people retire at a certain date, that their benefits have to be paid in a particular format or that they have to buy a pension annuity at retirement. We now have about 130 international schemes established on the Isle of Man and assets of around £600m (€896m)."
Guernsey-based insurance companies also offer international pension arrangements for employers. If employers want to have a choice, they can set up a self-administered arrangement through an offshore trust in Guernsey, depending on what employers feel is the most appropriate way to secure benefits.
Ian Morris, partner at consultancy group BWCI in Guernsey, says: "In contrast to most European countries, where regulations are quite strict, it's possible to have more flexibility in an arrangement structured offshore. For instance, it is possible to provide a significant lump-sum benefit."
Morris believes Guernsey's arrangements come at a lower cost, as the is-
land does not have the same amount of pension legislation as the Isle of Man. He says: "The Isle of Man has a considerable amount of legislation
for their offshore pension arrangements. I guess they would see that as beneficial because offshore entities and employers may be more comfortable with it. But insurance companies are regulated in both jurisdictions."
Simon Dudley, senior international consultant at Watson Wyatt, explains: "The Channel Islands and the Isle of Man all have a broadly similar regulatory environment. Sometimes the choice of location is geared more towards the offshore location selection of the provider. But all of these locations are very keen to provide a regulatory framework while at the same time trying not to stifle individual companies or individuals that select locations for these plans."
But he adds: "Offshore plans are not necessarily the most tax-efficient of pension fund vehicles. However, they do provide financing and investment opportunities for the pension schemes of mobile workers. And that outweighs the less than attractive tax position for some of the individuals concerned. At the moment, offshore locations are attracting defined contribution (DC) types of plans although they can still do defined benefit (DB) arrangements. They provide good security and infrastructure for a pension plan outside the country of an individual's employment." And with effect from 1 January 2007, Jersey was approved by the Dutch finance minister as a jurisdiction with adequate supervision and is now one of the few jurisdictions whose funds can be listed on Euronext under a fast track and light touch regime. Regulations in offshore centres such as the Channel Islands, the Isle of Man and Ireland are simpler, more practical and have fewer restrictions than those of domestic country legislation, while Luxembourg uses a different structure to trust laws altogether.
Gerd Gebhard, director of Pecoma International in Luxembourg says that Luxembourg's offshore pension schemes are modelled on the plans of other offshore centres, because they typically are DC plans with variable premiums and a reasonable amount of flexibility on pay-outs and insurance cover.
But because Luxembourg - in contrast to its local company pension schemes - has no specific legal framework for expatriates, no particular rules cover these types of pension schemes, and they are offered by insurance companies only.
Gebhard says: "The advantage of the Luxembourg jurisdiction is the offshore life insurance industry's support and its industry experience with the product, because it is being sold on a similar basis to an individual pension, with the exception of being contracted through the company for the benefits of its employees. Due to the lack of a specific framework, there's a large degree of liberty in setting up
a pension scheme according to an individual's needs. But it is important
to bear in mind that, like in any other offshore jurisdiction, taxation will apply in the country where the premium-paying company is located and again in the country where the benefits are taken."
"The difference between Luxembourg and the Channel Islands is EU regulation. If a company provides an offshore plan to ex-patriates within the EU it falls under EU regulations and would need to comply with the IORP directive, which means it is no longer an offshore pension," Gebhard says.
He adds that individual and company pension schemes do not differ much for the true expatriate pension scheme, as they are only subject to insurance contract law and are often only offered to top management employees because they are effectively done as individual policies grouped together for an employer.
Partner at Luxembourg's PricewaterhouseCoopers Mervyn Martins says Luxembourg's advantage is its tax-efficiency.
He adds: "Another advantage is the country's top-up plan for mobile executives. If employees frequently move around it's very difficult to get them into local schemes, which are inefficient, restrictive and result in fewer benefits. When employees are outside their country they can either suspend their local plan or continue contributing, depending on what each country allows. But they also contribute towards a temporary Luxembourg top-up plan in their time abroad. Whatever they cannot do that is beneficial in their local country, they top up in their Luxembourg plan.
"Luxembourg offers the legislative flexibility today to either create a pan-European fund or a top-up plan - despite being a full EU member - and the only problem is comparability with regulations in different countries. Plenty of support facilities are available in Luxembourg as it is the second biggest investment management location in the world. And taxation doesn't fall under tax jurisdiction that is favourable to the local employers."
Martins also says that Luxembourg vehicles allow certain countries' local plans to mutualise their plans in cross-border schemes, depending on their legislation. He regards this pooling through a Luxembourg vehicle as a prototype of a true European plan and says that in the future, theoretically every country's investments can be pooled in Luxembourg subject to politics and legislation.
"There are some individual private structures at the moment that serve a certain particular niche area in each company", he adds. "International groups will not run Luxembourg plans as their main plan but as their top-up plan, depending on foreign regulations. Generally, when choosing an offshore location, it is important to consider tax-efficiency, legislation with regards to governance and whether the location is a full financial centre or not. I think the Channel Islands and Dublin are well developed. But Luxembourg's main competitors today are the big economies, and not the offshore centres, because a lot of the plans already exist in the bigger countries. But regulatory difficulties often hinder these plans. However, our regulator is very well developed in terms of control. And I think that safety factor is important."
But international adviser Mercer's principal consultant Yvonne Sonsino does not see a lot of differences between the offshore jurisdictions. She believes that the choice of location depends on the type of service companies need from the provider and whether they exist in that jurisdiction.
She says: "There are a lot of pension trust type companies in the Channel Islands, for example. But the Isle of Man has slightly different types of provider - more insurance companies. Apart from the Channel Islands, workers outside the EU could also be using Luxembourg or Ireland."
And while members and motives for offshore solutions may have changed, the industry still reports plenty of interest.
"It's become easier to retain people in home country arrangements," Morris explains.
"That's why offshore solutions now tend to be used for employees who work outside of Europe rather than within Europe and whose employers still want to provide benefits. This is possibly a change from the past. We have seen a lot more interest recently due to more EU regulations, which have made it more difficult to have employees from more than one European country, as pension schemes are supposed to be fully funded."
Lightfoot says the Isle of Man mainly offers solutions to European companies that employ a number of ex-patriot staff outside the EU. The Isle of Man, like the Channel Islands, is not an EU member state and therefore not party to the EU pensions directive and is not being used for EU cross-border pension schemes. Instead, cross border schemes have been set up for hotel companies, airlines, international banks and fund management companies which employ people in ex-patriot roles external to the EU, such as Africa, Asia, the Middle East and the US, according to Lightfoot.
Watson's Dudley also sees offshore jurisdictions as good vehicles for regional plans outside Europe.
He says: "We, for example, have a client who has several hundred employees who move around on a regular basis within and outside of the EU for whom he has to establish defined contribution pension provision plans. One of the advantages of offshore locations is that while the trust might be based there, the administrators don't necessarily have to be, and in some instances they are in other locations. But that does not mean that investment opportunities are limited. Plenty of platforms are available with different companies providing investment opportunities for people in these funds." Pecoma's Gebhard thinks that due to the lack of a regulated entity and because of schemes' common nature with individual arrangements, it is difficult to tell to what extent European corporates have been using Luxembourg to supplement their pension schemes.
He says that Luxembourg's offshore business plays a significant role but adds that it is difficult to establish what share goes through employers or individuals and what are ex-pat and private policies. Martins says: "There's less interest today in offshore Luxembourg than there was about two or three years ago. At the moment I think it's become more of a specialised matter, but not in terms of administration - we don't do administration of international plans here on the same scale as Jersey."
For newer EU countries such as Malta and Cyprus it is still early days.
Since phasing out its offshore regime between 1994 and 2004, Malta has moved to a one-company regime and its legal framework no longer discriminates between offshore and onshore business. As an EU member state, Malta has adopted a pan-European pensions framework in line with the EU pensions directive.
The primary legislation has already been implemented, which means that the standards of pension scheme regulation and supervision adhere to the European standard. Legislation relating to retirement funds that may be used as pension pooling vehicles is also in place.
However, some refinements unrelated to the EU directive are still being drawn up and the government is reviewing certain tax aspects. But guidelines will be published shortly and the framework is expected to be launched in a few weeks time. With the primary legislation in place, an employer could already set up a European cross-border pension scheme under Maltese law.
Michael Xuereb, director of business development at the Malta's Financial Services Authority, says: "It may be slightly premature to talk about the advantages of a Maltese pension scheme. However, one can certainly say that it is based on the European pensions directive and has all the guarantees for cross-border contributions that you would find in other EU member states."
However, Alfred Mifsud, chairman of asset managers Crystal Finance Investments based in the Maltese capital Valletta, believes the island cannot offer anything to the international client at the moment because the full second and third pillar pensions legislation - which also covers the transition period - is not in place yet. And he adds that international companies haven't used Malta for pensions yet.
In November 2006, the EU directive passed into local legislation in Cyprus, meaning that the new Cypriot framework is now also under the EU directive.
But the problem with Cyprus is its lack of laws on private pensions, according to Christos Akkelides, director of asset management services at Egnatia Financial Services in Nicosia. Akkelides says that he is not
aware of any interest from international employers at the moment and says that individual type pension funds are limited to a few insurance policies that are with pension companies.
Philippos Mannaris, head of Hewitt's Retirement and Financial Services practice for Cyprus clients, adds: "I don't know to what extent European corporates have been using Cyprus to supplement their pension schemes. But they have been using Cyprus quite extensively recently due to the favourable tax treatment, as Cyprus has the lowest tax rate - only 10% corporate tax - in the EU. We have seen a lot of new company registrations from Greece and other EU countries in the last two years following the accession to the EU. But in terms of pension provision we haven't seen European multinational employers setting up such plans in Cyprus. The pension plans in Cyprus are currently for local employees only."
Gibraltar is also rated as a highly attractive offshore location. Robin Ellison, chairman of the UK's National Association of Pension Funds (NAPF), believes this is because English is the country's official language and the fact it is sympathetic to offshore financial services, has a skilled workforce and a simple, straightforward legislation based on the old UK system.
Ellison, who is a pensions partner with City land firm Pinsent Masons, expects Gibraltar to be compliant with the EU's IORP directive in the near future because the jurisdiction's regulators have in the past demonstrated their commitment to it and he adds: "I am currently using Gibraltar for a number of prototype pension arrangements in order to find out whether they work. My guess is that Gibraltar will in due course be an attractive jurisdiction."
Ellison believes Gibraltar and other offshore jurisdictions will become more popular once they get their regulatory framework in place. He adds that countries like Gibraltar benefit from their ability to move into the electronic age almost immediately. Very effective electronic registration and electronic supervision at a low cost in theory gives them the advantage over older jurisdictions.
Ellison says the IORP directive is silent on tax, while the driver behind the tax liberalisation is the European Court of Justice. All countries have to give cross-border tax relief according to the law. But getting the tax relief is going to take a couple of years, he believes, because a lot of countries such as the UK, Denmark and Sweden simply ignore it, although the EC is determined to make them comply.
Ellison also regards Ireland as an attractive jurisdiction for European schemes. But he thinks that for non-EU schemes, when people work offshore in Angola, for instance, it would not be a good choice. In this case, the Isle of Man or the Channel Islands are better options, he says.
Assistant head of information at the Irish Pensions Board Angus Horgan says that the advantages of Ireland as a location base for offshore pension schemes are the country's tried- and-tested pensions workforce, its track record of success in pensions, an enabling tax regime, an advanced communications infrastructure, good regulations, a friendly environment for multinationals and its financial services centre.
Sean Langdon, development manager for corporate financial services at the Industrial Development Agency (IDA) in Ireland, adds: "No European country has yet established a pan-European pension but Ireland - one of the early IORP adopters - with its asset- and liability-pooling and administration already has the structures in place. A lot of companies have pooled their assets in Irish asset pooling vehicles. And the pan-European pensions taskforce, established by the government, allows for quick recommendations and actions, which has created a conducive environment.
"Our main competitors are likely to be the main financial centres such as London, Amsterdam or Luxembourg. The disadvantages of locations such as the Channel Islands and the Isle of Man are that they wouldn't be able to offer pan-European pensions as they are not part of the EU."
onsino says it is very popular at the moment to set up a plan in an offshore location, in particular for expatriate employees rather than local employees.
She adds: "A lot of companies have set up plans, in particular expatriate ones, in one of these neutral places to provide an extra pension plan for their overseas workers. We are not sure about the cause of the immense competition for ex-patriot employees because there are currently no external drivers, such as major changes in expatriate packs. It just seems that companies are very active in reviewing their policies at the moment and to meet the ongoing needs for mobile employees they need to have a pension solution."
However, there are disadvantages. The main one, according to Dudley Watsons, is that such plans or contributions to such plans may not be regarded as tax-deductible to the corporate sponsoring employer at the time the contributions are made. In some jurisdictions, the contributions paid by the company may be treated as a taxable benefit, depending on the rules of the plan and what country the individual works in.
Sonsino says: "Offshore plans are not as tax-effective as local domestic provision. If you work, for example, in Canada and you are in a Channel Island plan it might be more tax-efficient for you to be in a Canadian plan rather than a Channel Island plan. The choice is often driven by whether the offshore-based providers can deliver the type of plan design that the company wants to set up. So although the company knows it's not going to be as tax-effective as a normal plan, at least it's a single central vehicle to put ex-patriates into."
She adds: "So far there's been a huge amount of activity in the Channel Islands and the Isle of Man but Ireland and Luxembourg are becoming increasingly popular in the pan-European scene because of the cross border tax advantage of EU members following the change in European tax legislation. But they also have to comply with the IORP directive now. If the jurisdictions are non-EU members such as the Isle of Man and the Channel Islands it doesn't really matter where the plan is because there will be no tax advantages for them. "
The general tax guidance is, the more there is a risk of forfeiture or non-vesting of the benefits, the less likely there is going to be a tax imputation when the contributions are paid or tax deductibility might be allowed. But the more forfeiting clauses the plan contains, the less attractive it is for employees.
Consequently, companies have to find a compromise between medium vesting and no vesting at all in terms of their own particular population and what they are trying to achieve. This applies to mobile workers outside Europe as well.
Dudley says: "The now available system enables individuals to have access to individual accounts for the selection of investments through web technology for DC schemes, which was impossible 10-15 years ago. At the moment, we seem to be entering a period of a competition between European countries that would like to be a home for a pan-European pension fund. And to a certain extent, pan-European pension funds themselves may become potential rivals to the offshore locations, depending on the mix of membership, the country they are working in and the level of importance of the tax deductibility versus the simple and straightforward nature of a single uniform provider for a particular workforce."
onsino regards pan-European pensions as the single biggest business threat to offshore jurisdictions
because of their tax efficiency. She expects the need for offshore solutions to decrease as members who would have previously used an offshore plan switch to a pan-European plan.
She explains: "We haven't yet seen it in actual volume of business transactions but I think a decrease is inevitable. And even if people work outside the EU they could still be members of different country sections in pan-European pension plans."
But Ellison believes that non-EU offshore schemes will be able to compete with a projected norm of simpler, easier and cheaper pan-European pension schemes in the future, as they will provide different things.
In fact, he is currently setting up a world pension scheme for people working in a particular industry all around the world. Ellison is trying to set up parallel schemes, a EU scheme and a non-EU scheme. The EU scheme is expected to be in Gibraltar and the non-EU one with worldwide cover in the Isle of Man. People who are in the EU will get cross-border tax relief, while people who are in the Isle of Man may or may not get tax relief.
And Dudley agrees: "I believe offshore jurisdictions will still be attractive once pan-European pensions funds take off because pan-European funds will only cover EU-based employees. For non-EU based employees, offshore locations will still provide an attractive solution."