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Pan european-pension-funds-09

  1. 1. Pan-EuropeanPension Fundsin a Future World
  2. 2. ForewordWhat is the best location for pan-European pension funds?The importance of pan-European pension funds may easily be overshadowed by the current turbulence on the global financialmarkets. The sharp decline in the financial markets has had a devastating impact on the coverage ratios of many pension funds.Together with falling interest rates, it has reduced the average coverage ratio of many pension funds to a level well below 100%.The existence of under coverage has serious implications for pension schemes. Lower indexation rates, increased contributionsfrom employees and sponsors, and even decreased benefits are potential solutions. Another consequence is that the portability ofpensions is restricted when there is insufficient coverage. Furthermore, companies have become aware of the risks involved inproviding a defined benefit (DB) pension scheme if they can be held responsible for all or part of a financial deficit of the pensionfund.There are enough short-term problems for pension funds to keep management’s attention, but in the longer run other issues, likethe ageing of the European population, cannot be ignored. Over the next 20 years, the ratio between active (contributing) pensionfund members and beneficiaries will change drastically. As countries with large pay-as-you-go systems will be the first to sufferfrom this, they are looking into the establishment of funded systems. This will possibly enlarge the pension fund market on anunprecedented scale. The funded pension schemes will change over time from net asset accumulators (when the contributionsoutweigh the benefits paid) to institutions paying out more benefits than they have contributions coming in.More and more multinational companies are looking at the possibilities of setting-up a pan-European pension fund. What would bethe best location for such a fund? Ireland, Luxembourg, Belgium, the U.K. and the Netherlands seem to be the main contenders.How do they compare in terms of solvency requirements, governance, taxation and flexibility?These and other factors will determine the ideal location for a pan-European pension fund in this report. These topics are reviewed,reflecting the key characteristics of the legislation in contender jurisdictions to serve as an inventory of the current status of theimplementation of the IORP Directive in those Member States.We trust this report will be a useful source of information for the decision makers in the pension community.March 2009Prof.dr. A.H.M. Daniels, Ernst & Young Partner Financial Services, Amsterdam Pan-European pension funds in a future world 3
  3. 3. 4 Pan-European pension funds in a future world
  4. 4. Executive summary• For a country to become the home state of a pan-European • Regarding investment management principles, some states pension fund, a good infrastructure of financial service have additional requirements that exceed the requirements providers is a definite advantage. Moreover, the legislation of the Directive. Some of these requirements might be in that country must allow for various financial products to valuable in today’s climate of more demand for run a scheme for different people in different countries transparency, governance and risk management. under different labor laws. • In terms of information requirements, pension funds in all countries need to proactively inform the various• The introduction of the IORP Directive has prompted stakeholders through annual reports, benefit statements countries to change their national pension legislation to and statements of investment policy. Properly informing varying degrees. Some have hardly implemented any the pension fund members and beneficiaries is governed changes at all, while other countries – notably Luxembourg by the prudential or the social and labor law in the host and Belgium - have created new legal entities specifically countries, making arbitrage between home countries on designed to cater for pan-European pension funds. this subject very unlikely.• Looking at the country level, there are still many issues to • Legislation on ring-fencing varies widely, due to the lack of be resolved before Europe becomes a level playing field for a proper definition of the term. The Netherlands seems to pension funds. The differences often result from a national have the most restrictive legislation applying to this social and labor history that has created a diverse range of subject. retirement systems in Europe, with all sorts of pension • The current tax regimes for pan-European pension funds funds active in each system. are nearly equivalent, with the exception of the application• The IORP Directive targets private, funded occupational of the VAT regimes. In other words, there is the paradox pension funds, the largest markets for these being the that different interpretations of the EU harmonized VAT United Kingdom and the Netherlands. Other European legislation lead to the greatest distortion in the tax markets are emerging as countries switch from unfunded treatment of a pan-European pension fund. Luxembourg to funded systems. and Belgium, followed by Ireland, seem to have the most• The IORP Directive encourages the creation of pan- favorable VAT-regime for pan-European pension funds. European pension funds, with international assets and • Luxembourg, the Netherlands and Ireland are mentioned liabilities brought together in a single legal entity. This when it comes to asset pooling. Luxembourg has excellent offers opportunities for multinational companies to facilities and plenty of experienced service providers. increase efficiency, reduce operational risk and improve Ireland might appeal to U.S. stakeholders as it shares the governance. Anglo-Saxon culture. For pension pooling or setting up a• CEIOPS has identified some 70 instances of pension funds pan-European pension fund, Luxembourg and the having established international activities. The research Netherlands are mentioned. Belgium would be the does not provide details on the identity of these cross- preferred choice, if regulatory arbitrage in relation to border pension funds, making it difficult to evaluate the solvency were the only decision criterion. However, cultural nature of the reported cross-border activities. Most similarities, the perceived quality of the system, the instances are examples of asset pooling rather than the presence of experienced service providers and even the creation of a pan-European pension fund. practicality of physical proximity are other criteria mentioned.• Looking at the key aspects of the pension fund-related • Taking note of this complexity, we have seen two business legislation per country, it turns out that each country has models emerging for the establishment of a pan-European translated the Directive differently, with each country pension fund or IORP, the ‘single corporate model’ and ‘the having different legal entities and different rules governing multiple clients model’. The assumptions underlying each what types of scheme can be implemented. Only the model are different, leading to differences in perspective. registration procedure of an IORP is similar in the five Both models can be implemented in a step-by-step countries investigated. approach and both could eventually lead to a fully• On solvency, arbitrage may arise specifically because of operational pan-European IORP. the level of the required technical provision, with Belgium and the United Kingdom having far lower requirements than the Netherlands. Pan-European pension funds in a future world 5
  5. 5. 6 Pan-European pension funds in a future world
  6. 6. Table of Content Introduction page 91. The European market for cross-border pensions page 111.1 European pension overview page 111.2 IORP Directive and the market for page 14 occupational pension schemes1.3 Stakeholder views page 202. Prime location for pan-European pension funds page 222.1 The legal framework page 222.2 Solvency rules page 372.3 Investment management principles page 412.4 Required information page 432.5 Ring-fencing page 462.6 Framework outsourcing page 482.7 Taxation page 483. Emerging business models page 533.1 Single corporate model page 533.2 Multiple clients model page 55 Pan-European pension funds in a future world 7
  7. 7. 8 Pan-European pension funds in a future world
  8. 8. IntroductionThe EU Directive (2003/41/EC) on the activities of could be managed remains a distant vision, mainly due toinstitutions for occupational retirement provision (IORPs), labor and social laws, different regulatory reportingcommonly known as the IORP Directive or Pension Funds requirements and language barriers, cross-border activitiesDirective, was published in the EU’s Official Journal on are becoming more popular and approaching a pan-EuropeanSeptember 23, 2003, including the requirement of being pension model step-by-step. On the one hand, enterprises,incorporated into the legislation of each European Union particularly multinationals, are now exploring options forMember State by September 2005. All members were centralizing pension activities in order to be able to offercompliant as of June 2007, even though there are still some internationally coherent benefit packages, realize economies-issues to resolve. The IORP Directive encourages the creation of-scale and improve their risk management, while on theof pan-European company pension plans1. This initiative other, pension administrators and insurance companies areallows an employer to create a pension plan in one location looking to extend their package offerings.and cover all European employees under this single plan. TheDirective targets the integrated pension scheme value chain In the first chapter, we give an overview of the European(pension administration, pension communication, asset market for cross-border pension funds. The information inmanagement and risk management), whereas the providers this section is based on desk research as well as interviewsof these activities have thus far concentrated on national with stakeholders. Then, in the second section, we comparemarkets. the pension fund related legislation that was implemented in Belgium, Luxembourg, the Netherlands, Ireland and the U.K.In the current context of volatile financial markets, complex in order to provide a picture of how these countries areaccounting rules and toughening regulations, companies are trying to facilitate the establishment of pan-Europeanmore aware of the financial risks associated with their pension funds. At the same time, the best practices andpension plans and they are looking for new ways of competitiveness of these regimes in attracting pan-Europeancontrolling costs and reducing risks. This Directive could be pension fund activities are considered. A comparison is madeseen as the “holy grail” for moving towards a more using the key aspects of the organization of a pan-Europeanintegrated European pension strategy, enabling cost pension fund: legal framework, solvency rules, investmentefficiencies, increased competitiveness and shared risks, as management principles, required information, ring-fencing,well as possibly easing the cross-border mobility of outsourcing and taxation. And finally, in the third section, weemployees. But until today, the effects of the Pension Funds present two emerging business models for the establishmentDirective have been moderate, and concrete actions have of a pan-European pension fund or IORP. Both models can bebeen limited to the bundling and outsourcing of certain parts implemented using a step-by-step approach and both couldof pension activities. eventually lead to a fully operational pan-European IORP.Does that mean that the Directive is more mirage than reality? Note: The life insurers and the introduction of the EuropeanSome experts do not think pan-European schemes will ever passport, that in effect allows life insurers to run pan-happen; some say it is an absolute fantasy! Is that true? European businesses, are not the subject of this research. They will occasionally be mentioned, however, because theirEven if the arrival of real pan-European pension platforms solutions are so close to the pan-European pension fundfrom which all aspects of pension funds in different countries solutions, that they cannot be ignored.1 It should be noted that the Directive only applies to funded occupational pension schemes; it does not apply to state schemes or individual arrangements. Pan-European pension funds in a future world 9
  9. 9. 10 Pan-European pension funds in a future world
  10. 10. 1 The European market for cross-border pensions1.1European pension overview The European market for pensions does not have the characteristics of a single market, but is a patchwork of• Pension funds can be found in every European country. national retirement systems. Every system has its own The largest funds in Europe, measured by the total value elements, resulting from the country’s social history and, in of their assets in 2008, are predominantly English, Dutch particular, its labor relations. The building blocks for any and Scandinavian. The Scandinavian funds are mostly retirement system are the different pension schemes, run by public entities, however, and therefore not considered pension funds or insurers. Together, these schemes under the IORP Directive. The pensions market is very determine the income a person will receive after reaching diverse with many different forms of retirement provision. retirement age – usually 65. This post-retirement income, or In general, the UK and the Netherlands have the largest pension benefits, can be defined as payments made to a markets, measured in terms of total pension assets. In the pension fund member (or dependants) after retirement2. future, as more countries reform their pension systems in the light of the ageing population, new pension growth- Pension fund activities markets will emerge throughout Europe. The pension funds or insurers running a pension scheme need to perform certain activities in order to pay the right benefits to the right person at the right time. The four mainTable 1. Top 30 pension funds in Europe activities are: bln € 1 Government Pension Fund - Global Norway 242 1. Pension Administration: A pension fund has to keep track 2 ABP Neth 205 of all its members and all other relevant data needed for 3 PFZW Neth 88 the calculation of premiums due and pension rights. An 4 Arbejdsmarkedets Tillaegspension Denm 56 important part of this activity is collecting the premiums 5 Reserva de la Seguridad Social Spain 56 from the active members and paying out the benefits to 6 British Telecommunications UK 54 7 Alecta Swed 43 the beneficiaries. 8 Bayerische Versorgungskammer Ger 41 9 Universities Superannuation Scheme UK 36 2. Asset Management: The premiums collected have to be 10 Coal Pension Trustees UK 34 invested in order to make sure that when a pension fund 11 Electricity Pensions Services UK 33 12 Metaal en Techniek Neth 33 member is eligible for retirement, the funds to pay his or 13 Danica Pension Denm 33 her benefits actually exist. 14 Fonds de Reserve pour les retraites Fra 31 15 Varma Mutual Fin 30 3. Risk Management: This process is performed for large populations of pension fund members, so that longevity bln € 16 Royal Mail Pensions UK 30 and/or mortality risks of can be evened out. 17 AMF Pension Swed 29 18 PFA Pension Denm 29 4. Pension Communication: A pension fund needs to 19 Royal Bank of Scotland UK 26 regularly inform its members of the rights they have built 20 Railways Pensions Trustee Comp UK 25 up and what benefits they can expect in the future. In 21 Ilmarinen Mutual Fin 25 22 Government Pension Fund Norway Norway 25 addition, a pension fund needs to inform the supervisor of 23 Bouwnijverheid Neth 25 its current financial state. The supervisor then determines 24 AP Fonden 2 Swed 24 whether the fund is properly funded and could decide to 25 Local Government Pension Inst Fin 24 prescribe corrective measures. 26 AP Fonden 4 Swed 24 27 AP Fonden 3 Swed 24 28 AP Fonden 1 Swed 23 Access to the scheme 29 KLP Norway 23 There is a wide variety of pension schemes in Europe. The 30 Metalektro Neth 22 most commonly used factor to classify them is access to the scheme.Source: IPE Magazine, supplement Europe Top 1000 Pension Funds,September, 2008 Firstly, pension schemes can be subdivided into public and private pension schemes. The public schemes are run by the central government or other public sector bodies. They are traditionally financed on a pay-as-you-go basis (unfunded and benefits usually paid from general taxes), but with the ageing of populations, countries are starting to fund these schemes.2 OECD, Private Pensions, OECD Classification and Glossary, 2005. Pan-European pension funds in a future world 11
  11. 11. The private pension schemes are run by institutions other Figure 1. Net replacement rates for individuals, average income than the government and are generally funded. and mandatory programs 120 The second subdivision can be made between occupational pension schemes and personal pension schemes. Access to 100 occupational plans is linked to an employment or professional 80 relationship between the plan members and the entity that Percent establishes the plan (the plan sponsor). Occupational plans 60 may be established by individual employers or groups of 40 employers (e.g. industry associations) and labor or professional associations, jointly or separately. Access to 20 personal plans does not have to be linked to an employment 0 relationship. The plans are established and administered Netherlands Ireland Luxembourg Austria Hungary Germany Poland France Belgium Denmark United States United Kingdom directly by a pension fund or financial institution acting as pension provider, without any intervention by employers. The third subdivision is between mandatory and voluntary pension schemes. Mandatory pension schemes can be used Source: OECD Pension Statistics, OECD Internet Site, February 2009 by a government to attain a targeted post-retirement income for all people. Employers are obliged by law to participate in mandatory occupational pension plans. They must set up The figure shows the net replacement rate for some of the (and make contributions to) occupational pension plans main European countries and the United States. The net which employees will normally be required to join. Through replacement rate compares net incomes before and after voluntary schemes, individuals can always try to achieve a retirement and includes pension benefits and tax measures. higher post retirement income than targeted. The percentages shown are for mandatory pension programs only, i.e. excluding voluntary programs. Mandatory pension Replacement Rates schemes are most generous in Luxembourg, Austria, The different pension schemes form an integrated system Hungary and the Netherlands, with net replacement rates of following the three-pillar model used by the OECD and other over 80%. At the other end of the spectrum, the Irish and the institutions. English system only have a net replacement rate of around • The first pillar consists of public pension schemes. 40%. Individuals may choose to build up additional pension • The second pillar consists of private occupational pension benefits in voluntary pension schemes. This will be more schemes that have a mandatory character. likely to occur in countries with lower mandatory • The third pillar consists of private personal pension replacement rates. schemes. Defined benefit versus defined contribution The resulting benefits can be measured and compared for There are many ways to determine the amount of benefit the different countries. The usual way to do this is by paid to a pension fund member after retirement. The comparing the average pension income that an individual will distinction that has the most influence on how a pension fund receive in relation to his average pre-retirement income. This should be managed is that between defined benefit and is called the replacement rate. defined contribution schemes. This factor determines the risks involved for pension fund members and the pension fund itself or the pension fund sponsor. Defined contribution (DC) occupational pension plans are occupational pension plans under which the plan sponsor pays fixed contributions and has no legal obligation to pay further contributions to an ongoing plan in the event of unfavorable plan experience3. Defined benefit (DB) occupational pension plans are occupational plans other than defined contributions plans. In traditional DB plans, the benefits are related by a formula to 3 OECD, Private Pensions, OECD Classification and Glossary, 2005.12 Pan-European pension funds in a future world
  12. 12. the members’ wages or salaries, length of employment, or In the Netherlands, the private schemes are nearly all DB. Inother factors. In hybrid DB plans, the benefits depend on a the light of the current financial crisis and the risks involvedrate of return credited to contributions. This rate of return is for the plan sponsor in a DB scheme, there is a movementeither specified in the plan rules, independent of the actual towards more DC arrangements.return on any supporting assets (e.g. fixed, indexed to amarket benchmark, tied to salary or profit growth, etc.), or iscalculated with reference to the actual return on thesupporting assets and a minimum return guarantee specifiedin the plan rules.In Europe, both forms are common, with public schemesusually being DB and private schemes tending to be DC. Pan-European pension funds in a future world 13
  13. 13. 1.2 IORP Directive and the market for There are a few countries in Europe, where public pension occupational pension schemes funds, not being financed on a pay-as-you-go basis, hold significant assets: Norway, Sweden, Ireland and Finland. • The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has identified some 70 CEIOPS and cross-border activities pension funds that have established international With the largest pension fund markets in the UK and the activities. Most of these activities are actually Netherlands and the largest funds being Dutch, international asset management. Looking at the Scandinavian, Spanish or English, the European pension fund countries, we see that they are all adapting their market is dominated by nationally operating pension funds. legislation to make pan-European pension funds possible. These funds are registered and operate in the same country However, the barriers still outweigh the advantages, so as the country of the employment relationship that led to that the full-scale introduction of IORP has not taken off. establishment of the pension fund. The first country is called the “home country”, and the second is called the “host The IORP Directive applies to occupational retirement country”. CEIOPS monitors cross-border activities, where pension schemes only, excluding institutions managing social pension funds employ activities in a different country than security schemes, institutions operating on a pay-as-you-go the country where the pension fund members work, live and basis and institutions that are already covered by other pay their premiums. At year-end 2008, CEIOPS reported directives, such as life insurance companies4. These private 70 instances of cross-border activities5. occupational retirement pension schemes are operated by pension funds. The funds hold assets to cover the provision Figure 3. Reported cross-border pensions activities for benefit payments to people after retirement. 35 Figure 2. Pension funds investments (x million USD) As of January 2007 As of June 2008 30 2,500,000 25 20 2,000,000 15 1,500,000 10 5 1,000,000 0 Austria Belgium Finland Germany Ireland Luxembourg Portugal United Kingdom Liechtenstein 500,000 0 UK (2006) Netherlands Switzerland Finland Germany Ireland Spain Denmark Italy Poland Sweden Portugal France Norway Iceland Belgium Austria Hungary Source: OECD Pension Statistics, OECD Internet Site, February 2009 Source: OECD Pension Statistics, OECD Internet Site, February 2009 The cross-border pension funds employ activities in at least one host country other than the home country. It turns out that the United Kingdom is home to 32 pension schemes with In the graph above, the combined assets in 2007 for all the cross-border activities, with Ireland second with 22. The private pension funds per country are added, providing research also reveals that most of the reported cross-border insight into the importance of the pension fund sector for pension funds (56) have activities in only one different host each country. The large public pension schemes, like the state and 11 funds have activities in two or three different ones in Scandinavia, are excluded from this overview. host countries. There are two UK pension funds with activities in four different host states and there is one The largest market for pension funds in Europe is the United pension fund in Luxembourg with reported activities in 10 Kingdom. With assets worth 2 trillion US dollars (the US different European host states. The CEIOPS research does sector has USD 10 trillion in assets), it is double the size of not give the identity of the various cross-border pension the Dutch market. Switzerland is the third largest European funds, making it difficult to evaluate the nature of the pension fund market, in turn being half the size of the reported cross-border activities (is it ‘just’ asset pooling or is Netherlands. The other European markets are a lot smaller. it a ‘real’ pan-European pension fund as modeled above). 4 Directive 2003/41/EC of 3 June 2003, Article 2. 5 CEIOPS-OP-19/08 November 11, 2008, 2008 report on market developments.14 Pan-European pension funds in a future world
  14. 14. The IORP Directive allows an employer to create a pension pension fund are located in the home country. Thesefund platform located in one country (home country) and activities are under the supervision of the home country.operate several pension plans for employees working in Home country pension legislation determines how thesedifferent countries (host countries). The pension schemes in activities may be executed and how the pension fund has tothe host countries A, B, C and D contribute to the pension report these activities to the home country that has its activities located in home country B. Theemployment relationships, that form the basis for the Some countries have already grasped the opportunityoccupational pension schemes, exist in the host countries. provided by the implementation of the IORP Directive andSocial and labor legislation in the host countries defines the have designed dedicated pension vehicles to facilitate theshape of the pension scheme: who has access to the scheme, creation of pan-European funds, while others made only ais it a DB or DC scheme, who contributes how much to the few changes to their systems, as they rely on theirscheme, when will the scheme pay benefits, will there be reputations as favorite locations for pension funds. Below wecompensation for inflation, and other characteristics. The give an overview of the pension vehicles. These vehicles willhost country also determines the tax regime applying to be further analyzed in the section “Legal Framework”.contributions and pension provisions. The activities of theFigure 4. The IORP model for a pan-European pension plan Sponsor = Multinational company with employees in European countries A, B, C, D • The pan-European pension fund operating cross-border will only be IORP supervised by the Home Member State located in supervisory authority Home country B • Assets and liabilities co-mingle = Financial SINGLE FUND Services Aspects Host Country A Host Country B Host Country C Host Country D Section Section Section Section complies with complies with complies with complies with Taxation Country A Country B Country C Country D Aspects Tax laws Tax laws Tax laws Tax laws Social and Labor laws Country A Country B Country C Country D • Social and labor laws • Social and labor laws • Social and labor laws • Social and labor laws Specific • Specific investment • Specific investment • Specific investment • Specific investment investment and/or and/or information and/or information and/or information and/or information information requirements requirements requirements requirements requirements Benefits paid as if Benefits paid as if Benefits paid as if Benefits paid as if Country A Country B Country C Country DSources: EFRP, The EFRP model for European pensions, October 2003, and CBK analysis Pan-European pension funds in a future world 15
  15. 15. Figure 5. Pension vehicles Sponsor = Multinational company with employees in European countries A, B, C, D • The pan-European pension fund operating cross-border will only be IORP supervised by the Home Member State located in supervisory authority Home country B • Assets and liabilities co-mingle = Financial SINGLE FUND Services Aspects Host Country A Host Country B Host Country C Host Country D Section Section Section Section complies with complies with complies with complies with Taxation Country A Country B Country C Country D Aspects Tax laws Tax laws Tax laws Tax laws Social and Labor laws Country A Country B Country C Country D • Social and labor laws • Social and labor laws • Social and labor laws • Social and labor laws Specific • Specific investment • Specific investment • Specific investment • Specific investment investment and/or and/or information and/or information and/or information and/or information information requirements requirements requirements requirements requirements Benefits paid as if Benefits paid as if Benefits paid as if Benefits paid as if Country A Country B Country C Country D Dedicated pension vehicles Belgium • Organization for Financing Pensions (OFP) Luxembourg • Pensions Savings Company with Variable Capital (SEPCAV) • Pension Savings Association (ASSEP) • Pension Funds regulated by the insurance supervisory authority (CAA) Netherlands • The current legal situation (pension fund) taking into account limitations on domain and ring-fencing Several legislative proposals • Premium Pension Institution (PPI) • Multi Pension Fund (multi-opf) • All Pension Institute (API) Can be used as pension vehicles United Kingdom • Trust based occupational pension plan • A contract based group personal arrangement Ireland • A trust arrangement with trustees Sources: EFRP, The EFRP model for European pensions, October 2003, and CBK analysis16 Pan-European pension funds in a future world
  16. 16. Advantages of a cross-border pension fundUnder the Directive, cross-border assets and liabilities of a better harmonization and standardization approach ofpension fund can be combined within a single legal entity. its pension plans.This offers opportunities for multinational companies to gain • Multinationals can focus their attention on one singleefficiency and economies of scale, with cost savings as a plan, reducing the risks which may result from poordirect result; reduce operational risk and improve governance.governance, with fewer providers and interfaces to manage; • The IORP Directive means that Member States acceptand facilitate mobility of employees across the EU and avoid a system of mutual recognition of each other’ sthe need to set up several plans. prudential supervision. As a result, pan-European pension funds report to one supervisor and comply Snapshot of the perceived benefits of a pan-European with one set of prudential rules (even if they still need pension fund to comply with the social and labor laws and specific investment and/or information requirements of the Efficiency and economies of scale host states – see the IORP model for a pan-European pension previously mentioned). 1. Benefits for the employer • The implementation of a pan-European pension plan reduces the costs of duplication by centralizing and Barriers against establishing a cross-border pension fund standardizing (as much as possible) the various We have seen the benefits of establishing a pan-European pension plan activities (asset management, pension plan. There are opportunities to save costs, increase administration, risk management and communication). management efficiency, improve governance procedures and • A pan-European pension plan could help multinationals facilitate employees’ mobility. In addition, specific dedicated to implement a European benefits strategy as a pension vehicles have been introduced to facilitate the management instrument, offering benefits to all their creation of pan-European pension fund. However, there is employees . currently no pan-European pension fund as the barriers still • It takes less time to oversee one plan than to manage outweigh the benefits. multiple schemes. For example, a multinational can implement one corporate intranet site to gather Firstly, the reluctance is inherent to Member State information for reporting as well as communication interpretation of specific articles. CEIOPS has collected purposes. comments from Member State supervisors on areas that have been problematic due to differences in interpretation 2. Benefits for the employees and implementation of the IORP Directive across the EU • For employees, increased efficiency could result in Member States, including reporting requirements (both to either improved benefits or lower contributions. supervisory authorities and to members and beneficiaries) • For small workforces located in different European and custodianship6. The report confirms that Member States countries, a pan-European pension plan could improve have “definitional differences” and that clarification is the investment prospects, as employees can enjoy the required in four areas: cross-border activity, subordinated benefits associated with being part of a larger loans, ring-fencing and investment regulations. operation. In addition, they can benefit from the more professional service level of a single pan-European Secondly, some of the biggest hurdles faced by retirement fund. multinationals have been discriminatory tax treatments in • Mobile employees can avoid complex series of the EU Member States, although these barriers have begun transfers from one pension arrangement to another to break down. Others include complying with the social and and will have a “one-stop-shop” for their pension labor laws of each country. As long as these laws are not arrangements, while centralizing their benefits within a harmonized within the EU, occupational pension products will single European fund also means dealing with one be subject to different requirements in the various EU payout institution. countries, which makes it very complex to administer cross- border contracts. In addition, the costs and amount of Operational risk and governance research needed to make such a move are quite discouraging. And finally, there is reluctance from Member • Multinationals would have a better coordination and States to see pension capital drift away from domestic control on their pensions’ benefit design, funding, markets. investment, administration, communication thanks to a6 CEIOPS, Initial Review of Key Aspects of the Implementation of the IORP Directive 31 March, 2008. Pan-European pension funds in a future world 17
  17. 17. of in-between options, where the pension fund establishes a Snapshot of the perceived barriers against the creation pan-European approach only for certain activities. A of a pan-European pension fund progressive, step-by-step implementation of these alternatives can be easier to manage and provide accelerated savings, as Interpretation and implementation of the IORP well as helping companies approach the creation of a pan- Directive European fund. In principle, each of the identified pension fund activities can be managed on a pan-European basis: • Each Member State has implemented the Directive differently, leading to further complexity. 1.Combining the administrations of pension funds or even • The Directive’s minimum supervisory framework pension schemes from different countries can lead to permits differences in the design of supplementary traditional scale advantages. Pension delivery supervisory measures, which makes it hard to compare organizations, like Mn Services or Syntrus Achmea in the the impact of supervision. Netherlands, are involved in this mainly on a national scale, • There is confusion about the IORP Directive on but could expand to a European scale. corporate governance. • A lot of uncertainties remain about the relationship 2.Combining the asset management of several funds is called between the IORP Directive and asset pooling. Through the collective management of Solvency II. assets, the benefits to the users of the service can be maximized. The European solution is to bring pension Legal and tax assets in Europe under a single roof, in order to achieve improved governance, increased operating efficiency, • There are too many differences in social and labor law reduced asset management costs and access to best-of- frameworks across Member States discouraging breed asset management solutions. companies from moving the scheme administration outside of their home countries. 3.Sharing the risks of several pension fund populations is • There are differences between the legal regimes under called risk pooling. This is an international profit sharing which pension funds operate in different countries system, which combines the premiums paid to insure risk (common law and civil law). benefits worldwide into a single account giving experience rating across borders. Should the claims paid by the Costs insurers and their expenses be less than the premiums paid, a profit share or dividend is paid to the multinational • The research needed to make such a move can be really company8. This results in reduced costs for risk coverage. expensive. The core principle of multinational risk pooling is that • The lack of products on the market is hampering subsidiaries buy their risk insurance from one network of progress towards the development of pan-European insurers. In addition to the financial savings if claims pensions. experience is positive, multinational risk pooling also • A pan-European pension fund can only start activities if provides other benefits, such as improved underwriting it has received authorization from each host Member and terms, annual financial reporting globally, and more State. As described in The Budapest Protocol7, which influence over local insurance companies. This is why provides a framework for the cooperation of supervisors multinational risk-pooling fits well into a pan-European in the area of cross-borders activities, the authorization pension strategy, offering a stronger corporate grip on process is complicated and long (see also the section pensions in Europe. “Legal Framework” for further details). This could lead to delays, and increased costs, especially if a company has a 4.Pension communication on a European scale would bring small number of employees in a large number of EU advantages only if it concerned communication with the States. supervisory authorities. This is also referred to as reduced governance costs. Communication with the pension fund As long as these challenges remain, progress towards a real members generally varies too much from country to pan-European pension fund will be slow. It is clear that full country to offer real scale advantages. Social and labor cross-border pension solutions can be complicated if laws from country to country are usually too different to implemented from scratch. There are, however, a number adopt a single approach. 7 Protocol relating to the Collaboration of the relevant Competent authorities of the Member States of the European Union in particular in the application of the Directive 2003/41/EC of the European Parliament and of the Council of June 3, 2003 on the activities and supervision of IORPs operating cross-border (CEIOPS-DOC-08/06), February 2006. 8 Definition taken from AEGON global pensions website on March 12, 2009.18 Pan-European pension funds in a future world
  18. 18. Combining one or more of the activities on a European scale, pooling, the facility for the investor to obtain, directly orthrough shared service centers for example, could eventually indirectly, the benefit of the reduced rate of withholding taxopen the door to other areas of integration. was generally absent, as the pooled vehicle, due to its legalIf pension funds cannot realize these scale advantages on a nature, might have been treated as an opaque vehicle wherestandalone basis, they may choose to outsource activities to the assets were treated as belonging to the vehicle itself.organizations that can. Pension delivery organizations or Today, some countries have sought to address this issue byspecialized asset managers are an option for pan-European establishing dedicated tax transparent vehicles, whereservice delivery. participants should be treated as investing directly in the pool of assets, and which benefit from all the advantages ofAsset pooling investing via a pooled arrangement. It specifically refers toOf the identified possible cross-border activities, the one the fact that all income and gains are treated as arising ormost commonly undertaken is asset pooling. Essentially, accruing to each investor, as if the income or gains had neverasset pooling by pension funds involves the investment of passed through the vehicle. At this point, dedicated assetcapital by two or more pensions for their joint account. The vehicles for pension funds9 can be mentioned, such as themain perceived advantages are benefits of scale, tax “Fonds voor Gemene Rekening” (FGR) in the Netherland, theefficiency and greater visibility and control, not only over Common Contractual Fund (CCF) in Ireland, the “Fondsfinancial risk but also over some broader types of decision- Commun de Placement” (FCP) in Luxembourg, and themaking. Pension Fund Pooling Vehicle (PFPV) in the UK. These dedicated asset pooling vehicles for pension funds areAsset pooling takes different forms, but in the context of this transparent for tax purposes and are therefore regarded asreport, one form is particularly interesting because it can ideal vehicles because they are more efficient than opaqueconstitute a first step towards the creation of a pan-European pools. Multinationals such as Unilever, Nestlé and IBM havepension fund. This is entity pooling. The assets of already introduced such tax transparent cross-border assetparticipating funds are aggregated in a separate legal entity – pooling vehicles, but the number of companies using theman asset-pooling vehicle – that exists separately from the remains limited.participants in the pool.The legal entity does not change the economic entitlementsof the participating funds, but it may change the legalarrangements by which those entitlements arise. This is whya distinction needs to be made between “transparent” and“opaque” entities. Until recently, in the case of pension assetFigure 6. Entity asset pooling Multinational company Multinational company Pension Fund Pension Fund Pension Fund Pension Fund Pension Fund Pension Fund Pension Fund Pension Fund Country A Country B Country C Country D Country A Country B Country C Country D • Belgium = SICAV / FCP Asset .pooling vehicle. . . • Ireland = CCF • Luxembourg = FCP • The Netherlands = FGR • UK = PFPV Asset Class 1 Asset Class 2 Asset Class 3 Asset Class 4 Asset Class 1 Asset Class 2 Asset Class 3 Asset Class 4 • Greater consistency in quality of asset management and performance • Better control and oversight over range of pension schemes with respect to management • This complex set-up is adding to company costs and administration • Reduction in transaction costs and asset management fees • Outsourcing of administrative and routine tasks • Simplified reporting from a single global custodian and administrator9 An asset pooling does not constitute a pan-European pension fund, as the local entities still have to be maintained in each “home jurisdiction” and local trustees still have to fulfill their fiduciary duties under domestic rules. Furthermore, only assets – as opposed to assets and liabilities – may be pooled within the types of vehicles that have been launched to date. Pan-European pension funds in a future world 19
  19. 19. 1.3 Stakeholder views plans worldwide. NCA also includes Nestlé Capital Management (NCM), an operational asset management unit • The stakeholders in the establishment of a pan-European with offices in the United Kingdom and Switzerland, and fully pension fund, apart from the regulators and supervisory authorized and regulated by the UK Financial Services authorities, are the companies and their employees on Authority. NCM manages part of the assets for Nestlé’s non- the one hand and the pension delivery organizations US pension plans and provides cross-border investment and (PDO) and life insurers on the other. The stakeholder advisory services. Nestlé’s new, shared-services approach to views, gathered through interviews and desk research, group pension fund management aims to lower costs and provide insightful information on considerations involved boost net asset performance, while strengthening Nestlé’s in deciding when and where to set up pan-European overview of group pension assets. activities. Separately, Nestlé has launched a pilot program to create a Companies and employees pan-European pension. The project is at an early stage and Companies want pension schemes for their employees that Nestlé is working on the clustering of a number of European offer the highest degree of certainty for the lowest costs. countries. Jean-Pierre Steiner CEO of Nestlé Capital Advisers Apart from the obvious tradeoff, companies place additional said, “The idea is to pool the company’s pension assets and demands on their pension schemes that could lead to the liabilities into a single vehicle. It is unlikely to happen on a big establishment of a pan-European pension fund. Multinational scale […] but we can start using such an approach companies may want to implement a European or global gradually”11. pension benefits strategy as a management instrument, offering benefits to all their employees. Or they may want to This gradual approach is also in the mind of Bernhard increase the overview they have by reducing the number of Wiesner, head of corporate pensions at Bosch “A lot is different schemes scattered across the globe (and thereby possible in a step-by-step approach. We believe that just reducing the risks of non-compliance). pooling asset management is not enough and we need to bring everything together within one administration platform One of the reasons to establish pan-European activities can first and one legal entity […]. Our approach is to cluster be to realize cost efficiencies. Governance over one large various regions and to consider amalgamation between fund is cheaper than governance over a handful of smaller regions”12. funds. The IBM pension vehicle achieves scale efficiencies through cross-border asset pooling and cross-border This view of clustering similar countries or a specific group of activities relating to administration. employees is also expressed by Chris Siebers of TNT when asked about the potential for pan-European pension funds. Other companies have also established asset pools. In 2005, Chris Siebers mentions two examples where a pan-European Unilever launched a tax transparent asset pooling vehicle in pension fund should be considered: Luxembourg (Univest) for its cross-border European pension 1.Internationally mobile employees (e.g. expats) traveling assets, using the FCP10. Shell Pensions set up an asset and working around the world and in need of good and pooling structure using the FGR in the Netherlands. consistent pension benefits. 2.Emerging markets such as Central and Eastern Europe or Some companies believe that pooling assets is not enough to Latin America where TNT has made a string of acquisitions gain sufficient administrative savings and see asset pooling and where it runs a large number of different schemes in as a first step towards a real pan-European pension fund. various countries. Nestlé, one of the pioneers in cross-border pension pooling, having begun its first fund in 2001, is going forward in 2007 A consolidation of the many benefit schemes into one fund with the creation of Nestlé Capital Advisors (NCA). This new (or alternatively at least harmonize and combine some structure provides actuarial and asset-liability advice and schemes) through a pan-European pension plan could very offers a number of services, including manager selection, risk well be in line with TNT’s corporate and local business budgeting, monitoring, multi-manager fund construction, objectives in terms of costs, benefit coverage and protection, and asset-allocation implementation for Nestlé’s 280 pension and pension risk management. It is also theoretically 10 ENP, November 3, 2008 and Financial Director, February 28, 2008 11 Bfinance, Pioneers in pension pooling, Nestlé consolidates global pension assets, April 29, 2007. 12 Investment & Pensions Europe, June 2008, “The Step-by-step route towards efficiency”.20 Pan-European pension funds in a future world
  20. 20. possible, because there are many similarities between these AEGON Global Pensions calls for more regulatory coherencecountries as regards the legislation governing pension funds. from the European Commission15.Olaf Sleijpen of Maastricht University refers to this as hightransferability when he compares the European countries and Mn Services will undertake the administration of large fundsplaces them on a so-called characteristics index13. The new if they are also given the asset management activities. Butpension fund should then ideally be managed in a mature instead of offering services in the UK from the Netherlands,market of financial service providers (e.g. the administration Mn Services has used its European passport to open a UKand investment management of TNT’s Dutch pension fund is branch. AEGON, too, has established an internationaloutsourced to TKP) with specific pension expertise as well as presence, not only in Europe, but in North America and Asiaknowledge of local pension culture. Chris Siebers explains as well. This will allow them to offer asset and risk poolingthat it could be interesting, therefore, to establish a single activities and pension administration for institutional clientsfund (or maybe harmonize some pension arrangements) in around the globe.countries where TNT lacks sufficient benefit-managementcapacity, or in countries that have several arrangements with Country attractivenessseveral insurers or other institutions. In all the interviews, the attractiveness of countries for the establishment of pan-European activities was discussed.A further consideration, that does include a tradeoff between Luxembourg, the Netherlands and Ireland are the favoritesrisks and costs, is transferring activities to countries with when it comes to asset pooling. Luxembourg has excellentlower regulatory requirements. Although this could facilities and plenty of experienced service providers. Irelandtheoretically lead to cost reductions, this view is not broadly has the advantage of being attractive for Americans, sharingshared by stakeholders. From a survey, however, CEIOPS the Anglo-Saxon culture. For pension pooling or setting up afound indications of regulatory arbitrage and supervisory pan-European pension fund, Luxembourg and thecompetition between Member States, especially in the area Netherlands were mentioned. Belgium would be theof solvency requirements14. preferred choice, if regulatory arbitrage were the only decision criterion. However, there are more criteria involvedPension delivery organizations and life insurers when it comes to determining the location of choice. CulturalThe other group of stakeholders consists of the pension similarities are mentioned, the perceived quality of thedelivery organizations and the life insurers that are looking system and the presence of experienced service providers,for new clients. Under the IORP Directive, they can serve and even the practical advantage of physical proximity.pension funds not only in their own (home) country, but in allother European (host) countries as well.A pension delivery organization will obviously only do so ifthe activities are profitable. According to Roland van denBrink of Mn Services, the specific administrationrequirements per country interfere strongly with profitability.Setting up an administration involves many extra costs anddoes not generate a lot of revenue. On top of that, thespecific requirements in some cases impede the realization ofscale efficiencies in administration. This is not good news forthe IORP Directive, since the administration requirements arelaid out in the social legislation of the host country, an areawhere the Directive has no force. Frans van der Horst ofAEGON Global Pensions adds that regulatory uncertaintyregarding pension pooling is another barrier to setting upinternational activities. Differences in interpretation of theDirective will not be in the interest of market parties lookingfor scale advantages across countries. That is also why13 Dr Olaf CHM Sleijpen, “On the exportability of the Dutch pension system to the European Union”, February 6, 2009.14 CEIOPS-OPSSC-01/08 Final Survey on fully funded, technical provisions and security mechanisms in the European occupational pension sector, 31 March 2008.15 AEGON Global Pensions View, Unfinished business – the EU pensions agenda and its impact on multinationals, 23 February 2009. Pan-European pension funds in a future world 21