Luxembourg International Pension Vehicles - Alfi

Contents2 Luxembourg as a financial centre4 Institutions for OccupationalRetirement Provision (IORPs)4 Pension fund solutions in LuxembourgLegal framework• Pension funds regulated by the financial supervisoryauthority (CSSF)• Pension funds regulated by the insurance supervisoryauthority (CAA)Legal entities• SEPCAV• ASSEP• CAA pension funds9 Actors in the pension businessSupervisionCustodyAsset managementLiability managementAdministration11 Summary table: Luxembourg pension funds12 How to comply with host country social andlabour legislation (IORP)13 Prudential frameworkConditions of operationQualitative rather than quantitative rulesInvestmentsFinancingTechnical provisionsExternal audit14 Authorisation procedure15 Tax aspects17 Alternatives to pension funds17 Pension pooling vehicle19 Group insurance contract20 Pension trust solution21 Why Luxembourg?23 Glossary

LuxembourgInternational Pension VehiclesLuxembourgas a financial centreToday Luxembourg is the home to over 155 banks, just under 60 life insurance companies and more than2,500 investment funds with assets under management of over 2,000 billion euros. Luxembourg is the largestfinancial centre in the European Union for cross-border distribution of individual and collective savings andpension products.Luxembourg has long held the ambition of positioning itself as a centre for the management andadministration of cross-border pension vehicles, as it believes in the future development of pan Europeanpension funds which present major advantages for multinational companies, such asgreater consistency in quality of asset management and performance;increased performance through securities lending, trailer fees and other commission mechanisms;better control and oversight on a range of pension schemes with respect to management andadministration;reduction in transaction costs and asset management fees;outsourcing of administrative and routine tasks;simplified reporting from a single global custodian and administrator.In 1999, the Luxembourg parliament passed a law on international pension fund vehicles whichanticipated the 2003 European Directive on pension funds (or “IORPs” as they are technically called).As the legislation aspires to attract foreign employers/sponsors, the characteristics of the law allow a highdegree of flexibility in plan design and the investment of plan assets. In 2005, parliament enacted a lawimplementing the IORP directive, which amended the 1999 law.The pan-European pension funds envisaged by this law are also appropriate to fund employee benefitprogrammes in countries outside the EU.Multiple recent regulatory changes both at EU level and in individual Member States make the cross-bordermanagement of pensions and the various advantages they trigger more worthwhile than ever before.Luxembourg offers unique advantages in this field, due to its qualities and experience as financial centreand to the appropriateness of the various solutions available.2

Luxembourg has a stable legal and political environment and, as a sovereign state, is a full member of theEuropean Union and other international organisations like the United Nations and the OECD.Luxembourg has been highly rated in international competitiveness surveys and can boast anentrepreneur-friendly environment. Government entities are business minded and the supervisoryauthorities are known for their competency and responsive attitude to business needs.Luxembourg companies can rely on multilingual staff, most of whom are fluent in English, French andGerman. Due to the international communities living in Luxembourg, knowledge of other languages suchas Italian, Spanish or Dutch is widespread. The supervisory authorities accept legal documentation draftedin French, German or English, the most widely used languages in the EU.In the area of employee benefits, Luxembourg based advisors and actuaries are accustomed to workingin an international environment as more than 50% of Luxembourg’s workforce is composed of foreignnationals many of whom have acquired vested pension rights in foreign jurisdictions.Extensive experience of cross-border business has made Luxembourg based professionals familiar withforeign regulations and business practices. For instance today, in the field of life-insurance, more than 95%of premium income is derived from cross-border business.This brochure introduces the various structures available in Luxembourg to meet cross border pension needs.Luxembourg• offers European companies two funding vehicles able to cover most common retirementprogrammes;• offers multinational companies operating several retirement plans one single platform with acommon currency;• enables sponsors to take advantage of the world class investment fund structure in Luxembourg.3

LuxembourgInternational Pension VehiclesInstitutions for OccupationalRetirement Provision (IORPs)Pension fund solutions inLuxembourgLegal frameworkPension legislation in Luxembourg givesit the lead on many other EU countrieswhere pension provision is consideredfrom a purely domestic perspective.The Luxembourg pension lawswere introduced in 1999 and 2000to create a flexible and secureenvironment for domestic and pan-European pensions. The legislationhas focused on the establishment ofthree pension funding vehicles withina robust regulatory environment toprovide security to beneficiaries andsponsors. This regulatory environmentfulfills all the OECD Pension FundCorporate Governance Principles, whileoffering sufficient flexibility to meetspecific requirements (such as socialcommittees, etc.).Luxembourg’s cost effective pensionframework is based on the overall needto ensure sound prudential supervisionand protection to future beneficiariesof the pension scheme. Economic, taxand political stability combined with anappropriate regulatory framework makethe Grand Duchy an attractive Europeanpension centre.Pension funds regulated by the financialsupervisory authority (CSSF)Building on the success and regulatoryexpertise of Luxembourg investmentfunds, the Law creates two pensionsavings vehicles under the prudentialsupervision of the regulator for banksand investment funds, the Commissionde Surveillance du Secteur Financier(CSSF).The Pension Savings Company withVariable Capital (SEPCAV) has a similarphilosophy to a SICAV investment fund,being a company with limited liabilitywhere the value of the benefits is equalto the number of shares multiplied bythe value of the shares. The SEPCAV canonly be used for defined contribution(DC) schemes.The Pension Savings Association (ASSEP)is a vehicle with an associative structurethat can be used for both DC and definedbenefit (DB) schemes. Its features aresimilar to those of non-profit makingassociations (“association sans butlucratif “) outlined in the Law of April21, 1928. An ASSEP is able to pay out alump sum or an annuity and may alsopay ancillary benefits such as death inservice, disability pensions and paymentsto widows and orphans.These pension vehicles are flexible asto the definition of legal and corporatestructure. The Law establishes a frameworkof pension scheme rules andregulations without significantly reducingthe flexibility to tailor individual schemesto the needs of the sponsoring companyand to asset and taxation rules ofindividual EU Member States.Security is provided through the requirementto have approval from the CSSFof directors, managers, asset managers,liability managers, and the scheme rules.In addition, the assets must be entrustedto a bank established in Luxembourg orin another EU Member State.After this initial control at the setting upof the fund, the CSSF provides ongoingsupervision of the procedures andoperations of the pension vehicle.Both the SEPCAV and the ASSEP enjoyattractive tax regimes (with respect totaxation of income, capital gains, netassets, VAT, benefit of double taxationtreaties, etc.).4

Pension funds regulated by the insurancesupervisory authority (CAA)The third option for a pension savingsvehicle lies within the framework ofinsurance legislation. These funds aresupervised by the Commissariat auxAssurances and referred to as CAApension funds.The CAA pension fund offers flexibilityin the form of a vehicle for definedcontributions, defined benefits and/orsupplemental benefits in case of deathor disability of members. Security isprovided by an ongoing guarantee of thesponsoring employer. As a consequenceof this guarantee the requirementsapplied to insurance companies, such aschoice of a technical interest rate or thesolvency requirements, are able to bereduced to a minimum. The rules appliedto CAA pension funds therefore combinesecurity and flexibility.Legal entitiesSEPCAVIn contrast to the Anglo-Saxon truststructure, a SEPCAV is a company in itsown right with a board and an annualshareholders’ meeting. Its features arecomparable to an investment fund(“SICAV” type, a company with limitedliability, where the value of the benefits isequal to the number of shares multipliedby the value of the shares). Incomeflowing into the SEPCAV would not beconsidered as “flowing through” (it is nota transparent entity from a Luxembourglegal and tax perspective).The minimum capital is one millioneuros, a figure that has to be reachedwithin two years from authorisation ofthe fund.Beneficiaries are shareholders of thefund. For the contributions paid intothe fund, beneficiaries are creditedwith a certain number of sharesaccording to a net asset value pershare which is calculated on a regularbasis. Contributions can be paid bythe employer and/or the employee. Allshares are registered shares and haveto be held, in principle, until retirementunless a transfer to a new pension planis arranged. In the case of departurefrom the company, vested rights can bemaintained in the fund.As beneficiaries are shareholders of thefund, this type of vehicle is appropriatefor defined contribution pension benefits.A SEPCAV is a cooperative companyorganised as a corporate entity. It ismanaged by a board of directors onwhich the employer can be represented.SEPCAV – in a nutshell• Société d’épargne-pension à capital variable• corporate form of an IORP• supervised by the Luxembourg financial supervisory authority, the CSSF• suitable for defined contribution (DC) plans• umbrella structure allows share classes for different nationalities andemployers• flexible business solutions• competitive tax environment both for the IORP and the sponsor5

LuxembourgInternational Pension VehiclesThe benefit would be a lump sum, atemporary annuity or a life annuity.However, for life annuities a specialarrangement with an insurance companyhas to be considered.The Luxembourg legislator has providedan attractive tax regime for SEPCAVs.While it is a taxable entity, investmentincome and capital gains “from securities”are tax free. This should allow SEPCAVsto benefit from double tax treatieswhile bearing a very low tax burden inLuxembourg.With regard to the beneficiary(= shareholder), the tax treatmentdepends on the jurisdiction of eachindividual participant.ASSEPAn ASSEP is not a company but anassociation. In contrast to the SEPCAV,the main bodies are the general meetingof associated members and the Boardof Directors. Associates are typicallyrepresentatives of the sponsor of thefund or the employer and representativesof staff and beneficiaries.Beneficiaries are creditors of the fund.The technical reserves of the fund,representing the affiliated members’rights, should reach a minimum of fivemillion euros after a start up periodof up to ten years. As for the SEPCAV,contributions can be paid by theemployer and/or the employee.An ASSEP can fund either a definedcontribution or a defined benefit plan.It can also be used to finance both typesof plans within a single legal entity(“multi compartment” concept). AnASSEP can also fund survivors anddisability benefits. Appropriate reservesneed to be set aside in this case. If theASSEP has no own funds to amortisepotential losses, part of the risk can alsobe transferred to an insurer or reinsurer.For defined benefit plans, the followingrules apply:• Technical reserves need to be valuedby a recognised actuarial method,be it prospective benefit methods oraccrued benefit methods. Only the ABO(accumulated benefit obligation), basedon current salaries, needs to be funded.ASSEP – in a nutshell• Association d’épargne-pension• associative form of an IORP• supervised by the Luxembourg financial supervisory authority, the CSSF• suitable for defined benefit (DB) and defined contribution (DC) plans• umbrella structure allows share classes for different nationalities andemployers• flexible business solutions• competitive tax environment both for the IORP and the sponsor6

Like an insurance company, the CAApension fund is subject to an externalaudit to be carried out annually by anindependent auditor.The assets must be deposited with afinancial institution approved by theCAA.CustodyApart from fulfilling the obligationsdefined by law, the custodian willbe in charge of the safekeeping andcurrent administration of the assetsof the pension fund. The functions ofcustodian bank for a pension fund aresimilar to those that custodian banksfulfill for an investment fund. Onemajor difference consists in the factthat the custodian of a pension fundhas to verify that the contributingcompanies proceed punctually to thepayment of contributions in conformitywith the pension regulations/fundingplans. Similarly, it is expected thatthe custodian oversee the paymentof capital or pensions to schemebeneficiaries.This implies putting into place astructured communication betweenthe entity in charge of the centraladministration and the custodian.Asset managementA SEPCAV or ASSEP can delegate assetmanagement to one or more assetmanagers with the approval of the CSSF.Where asset management is delegated toan external asset manager, in Luxembourgor abroad, this entity is nominated by theBoard of Directors. The decision whetheror not to delegate asset managementto an external asset manager can bemotivated by arguments of independenceor specific expertise required by theemployer. Although some or all assetdecisions can be delegated to an externalparty, the Board of Directors is stillresponsible for the investment principlesin general and the specific practices ofAsset and Liability Management (ALM)applicable to the fund.Frequently, the employer organisesa tender in order to select the assetmanagers best suited in terms of trackrecord, specific expertise and pricing.The Board of Directors will define theinvestment objectives and the assetallocation. The asset manager mustcomply with the investment principlesand restrictions defined in the pensionregulations and the funding plan. Inthe case of a defined benefit plan, thestrategic asset allocation of the portfoliowill usually be based on an ALM study,in order to link the portfolio to thecharacteristics of the correspondingliabilities.Liability managementMostly, the management of pensionand biometric benefits are outsourcedto a third party. This third party iseither an insurance company havingexperience in administering affiliatedmembers’ pension plan entitlementsor a specialised pension administrator.The liability management includes thevaluation of liabilities, the actuarialreporting to the supervisory authoritiesand other actuarial services (e.g. IAS19valuation), the issuing of certificates toaffiliated members and handling righttransfers and redemptions. It can alsoinclude the whole coordination withthe actors involved: custodians, assetmanagers, auditors and insurers.Some providers offer global web-drivensecure IT platforms to access one’spension rights, death and disabilityfeatures etc., or to facilitate themanagement of “unit-linked” type DCplans where affiliated members can,for instance, choose among differentinvestment profiles to invest theirpension assets.10

LuxembourgInternational Pension VehiclesAdministrationSEPCAVs and ASSEPs may be managedby the administrative agent under thesupervision of the board of the companyor association and as approved bythe contributing companies and thesupervisory authority.The administrative agent fulfills thefollowing tasks:• keeping of the accounts of the SEPCAVor ASSEP,• preparation of the annual accounts andperiodic financial statements,• calculation of the Net Asset Value forSEPCAVs,• CSSF regulatory reporting andestablishment of tax returns and taxprovisions,• provision of transfer agency andregistrar services,• provision of domiciliary agent services.Depending on the plan design and theorganisation of the pension fund, theadministrative agent can also providethe affiliates with information regardingbenefit entitlement and arrange forpayment of the benefits in accordancewith legal and regulatory provisions andas foreseen in the pension plan rules.Summary table:Luxembourg pension fundsDue to the impact of fixed costs,insurance solutions are generallypreferable for pension funds with assetsthat do not exceed ten million euros.It is important to mention thatLuxembourg has, from the beginning,separated its legislation on pension fundsfrom the legislation on occupationalpension plans for Luxembourg employers.For this reason there are no prescriptionson labour law, social security or taxationin the pension fund Law.ASSEP SEPCAV CAA Pension FundSupervisor of thevehicleFinancial supervisory authority(CSSF)Financial supervisory authority(CSSF)Insurance supervisory authority(CAA)Rights ofaffiliated membersAffiliated members are creditorsof the pension fundAffiliated members are shareholdersof the pension fundAffiliated members are creditorsof the pension fundType of plandesignDefined benefit, cash-balance,defined contributionDefined contributionDefined benefit, cash-balance,defined contributionTax statusTaxable entity and eligiblefor double tax treaties;however tax base is in practicezero. Possibility of setting up a“fluctuation reserve”Taxable entity and eligible fordouble tax treaties; however,in practice the tax base is verylimited.Taxable entity and eligiblefor double tax treaties;however tax base is in practicezero. Possibility of setting up a“fluctuation reserve”Multi-employerstructureAllowed Allowed Allowed11

LuxembourgInternational Pension VehiclesHow to comply with hostcountry social and labourlegislation (IORP)The Luxembourg legislation on pensionfunds, and in particular the Law of13 July 2005 on SEPCAV and ASSEP,has been specifically designed forcross-border activities. As a result,Luxembourg offers a working tool ofgreat flexibility enabling the specificneeds of multinational pension schemesto be taken into account and centralisedin a single financing vehicle. This vehicledoes not impose any constraints of itsown, but makes it possible to introduceany restrictions that either the initiatorof the pension fund or, as the case maybe, the local law of the employer, mightimpose. This is particularly true in theframework of the IORP Directive, wherethe host Member State (i.e. the Stateof establishment of the employer) rulesapply regarding social and labour lawprovisions as well as rules on informationto be provided to the affiliated membersand beneficiaries.A major aspect of the flexibility offeredby Luxembourg pension funds lies in thepossibility of setting up a pension fundas an umbrella structure, comprisingdifferent sub-funds. Although thepension fund constitutes one single legalentity, each sub-fund within such entityrepresents a separated portfolio of assetsand liabilities. The sub-funds within thepension fund are in principle ring-fenced,which means that each sub-fund isonly responsible for its own liabilities.No cross-liability between sub-fundsapplies. Since each sub-fund is allowedto operate according to its own rules,Luxembourg pension funds can adapt tothe needs of multinational companiesthat intend to provide different pensionschemes to their employees. Sub-fundscan be established to meet specificrequirements in terms of benefits(DC and/or DB schemes), in terms ofinvestment policy or in order to complywith specific requirements imposed bythe legal provisions applying to a givenhost State employer.Luxembourg pension funds have toestablish pension rules. These cancomprise a general set of rules applyingto the pension fund as a whole andspecific parts that target individual subfunds.For employers sharing the samesub-fund, it is permissible to establishpension rules per employer and thus totake into account each employer’s legalrequirements, such as, for instance, thewaiting period before rights are vested.Representation of employees, as affiliatedmembers and beneficiaries, atthe level of the governing bodies of thepension fund, is stipulated in the Luxembourglegislation on pension funds andparticularly in the Law of 13 July 2005on SEPCAVs and ASSEPs. However theLaw allows the employer to keep controlof the vehicle.General meetings of shareholders orassociated members can be organisedat the level of the sub-funds for mattersrelating to such sub-funds only.If needed or required under the locallegislation of the employer, specialcommittees can be set up either at thelevel of a pension fund or at the level ofa sub-fund. The Luxembourg legislationprovides a maximum of flexibility interms of creation, membership andpowers of such committees. For aCAA pension fund, usually establishedunder the form of a non-profit makingassociation, a mixed representationof employees and the employer is notnecessary.12

to its beneficiaries and to reflect thecommitments arising from the members’accrued pension entitlements. Theseliabilities should be represented at alltimes by equivalent assets. At the endof each quarter, the amount of thetechnical provisions and the amountof variation in the quarter have to besubmitted to the Commissariat auxAssurances.External auditDue to the international character ofthe financial transactions taking place inLuxembourg, Luxembourg based auditfirms have extensive knowledge of theinternational environment in whichpension funds operate.Home Member Statesupervisory authorityCSSF/CAAPan-Europeanpension fundAuthorisation procedureA pension fund operating cross-borderin different countries will be supervisedonly by the home Member Statesupervisory authority (where the pensionfund is based). Hence a pan-EuropeanASSEP or SEPCAV will be controlled bythe CSSF. The CAA pension fund willbe supervised by the Commissariat auxAssurances. Nevertheless, there willbe cooperation between the CSSF orthe CAA and the host Member Statesupervisory authorities where sponsoringundertakings of the pension fund arebased.Host Member State 1supervisory authorityHost Member State 2supervisory authorityHost Member State 3supervisory authorityWhen preparing a pension fundauthorisation file for the CSSF or theCAA, (statutes, pension rules, financingplan, investment policy principles,governance rules etc.), a notificationfile for cross-border activity must beestablished.Preparing the notification file for across-border pension fundA Luxembourg based pension fund hasto advise the CSSF or the CAA of itsplanned cross-border activity. The processis detailed in a CEIOPS 1 documentknown as the Budapest Protocol 2 ,published in February 2006. The steps areas follows:• Prepare and send the notification fileto the CSSF or CAA (including thename of the host Member State, thename of the sponsoring undertakingand the main characteristics ofthe pension rules – see BudapestProtocol Appendix 2 “List of the maincharacteristics regarding the IORP andthe pension scheme offered by theIORP in the host Member State”).1 Committee of European Insurance and Occupational Pensions Supervisors2 Protocol relating to the collaboration of the relevant competent authorities of the EU Member States, in particular in the application of the Directive on the activities and supervisionof Institutions for Occupational Retirement Provision (IORPs) operating cross-border (February 2006).14

LuxembourgInternational Pension Vehicles• The CSSF or CAA forwards thenotification file to the host MemberState supervisory authority withinmaximum three months.• The host Member State supervisoryauthority has a time limit of twomonths after receiving the notificationto advise the CSSF or CAA aboutspecific national labour and social law 1requirements or any specific investmentor information requirements thepension fund has to adhere to.• The CSSF/CAA transmits thisinformation to the pension fund.• Two months after the host MemberState has been notified, or on receptionof the communication of the hostcountry’s requirements, the pensionfund may start doing business in thehost Member State while complyingwith the applicable regulations.• The pension fund can operate crossborder.To obtain agreement to operate crossborder,it will therefore take a maximumHome Member Statesupervisory authorityCSSF/CAANotificationfile14Pan-Europeanpension fundInformationtransmissionof five months once the notification filehas been sent to the CSSF/CAA, andtypically less than three months. TheCSSF and CAA will normally transmitfiles rapidly to the host Member Statesupervisory authority.Note: Supervisory authorities in severalcountries (such as the DNB in TheNetherlands, the BaFin in Germany andthe CBFA in Belgium) have already issuedhelpful documents on their websites,concerning social and labour law,investment rules and communicationrequirements.2Notification file (within 3 months)3Information about specificrequirements (within 2 months)5Tax aspectsHost Member Statesupervisory authorityThe pension fund canoperate cross-borderLuxembourg companies/entities aregenerally subject to corporate incometax (22.88% on profits exceeding EUR15,000) and municipal business tax(6.75% on profits in Luxembourg City)leading to an aggregate nominal rate of29.63%.Luxembourg has an extensive taxtreaty network with 53 countries(as at 1.1.2008). Sixteen more are innegotiation. This allows considerablereduction or elimination of doubletaxation of income.1 As social and labour law requirements are compulsory wherever the pension fund is based, the employee has no disadvantage due to the fact that the pension fund is based outsidethe host Member State.15

SEPCAV, ASSEPLuxembourg SEPCAV and ASSEP pensionfunds have been designed to be as muchas possible “tax neutral” while consideredin Luxembourg as entities fully subjectto corporate income tax and municipalbusiness tax.They are subject to a small one-offcapital duty (€ 1,250) collected onformation and covering all operationsrelating to the aggregation of capital.SEPCAVs and ASSEPs are exempt fromnet worth tax.While the SEPCAV is subject to corporateincome tax and municipal business tax,there is an exemption for any incomederived from securities and gains realisedupon the sale of such assets. The taxablebasis is therefore very limited, such asto taxation on interest earned on termdeposits and real estate income.The ASSEP is also subject to corporateincome tax and municipal business tax.Technical reserves are tax deductible.An ASSEP supporting biometric risk,interest rate risk or benefits risk mayestablish a technical reserve as an extralayer of security which is tax deductibleand will offset the tax gains of theassets. This means that, in practice, therewill be only a very small, or no, taxableincome at all. Furthermore, if a pensionfund is funding DC retirement schemes,all income and capital gains derivedfrom the assets will be off-set by taxdeductible reserves representing thepension rights of affiliated members inthe pension fund.SEPCAVs and ASSEPs have to reportto the Luxembourg tax authorities theregister of members and beneficiaries,giving their names and addresses, totalrights at year end and details of anypayments made during the year.This provision, besides the fact thatSEPCAVs and ASSEPs are consideredin Luxembourg as taxable entities,is designed to allow transmission ofinformation to tax authorities of thebeneficiaries’ country of residence soas to obtain and facilitate applicationof double tax treaties signed byLuxembourg to SEPCAVs and ASSEPs.CAA pension fundAs for an ASSEP, Luxembourg tax lawprovides for technical provisions ofpension funds subject to the prudentialcontrol of the CAA to be considered astax deductible in computing taxation. Asa consequence, pension funds are largelyfree from Luxembourg corporate incometax and municipal business tax, thetaxation burden falling on the memberswhen benefits are actually taken.In contrast to the situation with regardto a SEPCAV or an ASSEP, reporting ofdata on beneficiaries to the Luxembourgtax authorities is not required by law, butcan be performed as no confidentialityprovisions have been introduced. CAApension funds are thus free to provideindividual data as is appropriate to thecircumstances.VATManagement services rendered tosupervised pension funds are exemptfrom VAT.16

LuxembourgInternational Pension VehiclesAlternatives to pensionfundsSome people see the fully fledged crossborderpension fund as a distant goal.Indeed, legal and cultural barriers seemto hinder the development of the pan-European pension fund at every turn.But there are intermediary steps that canlead to an integrated solution later on.Luxembourg offers the internationalpension market tools which enablea company to prepare for furtherdevelopment. Pension fund poolingvehicles, for instance, are becomingincreasingly popular throughout Europe.They allow the pooling of assets ofseveral pension funds in one entity.Two other legal structures which allowcompanies to fund pension liabilitiesin reliable external entities are groupinsurance and pension trusts.Pension pooling vehicleIn some cases, the cross-borderdistribution of IORPs might beburdensome and ultimately not costeffective. In these cases, pension poolingmay be a good alternative.Pension pooling allows companiesoperating in several countries to pooltheir scheme assets in a single vehicle.The pension pooling vehicle (PPV) in turninvests in a diverse range of assets suchas global equities, bonds, funds and cashon behalf of the pension schemes. As thepooling vehicle is composed of severalasset classes, a number of pools may becreated to match the varying objectivesof pension sponsors.This framework retains the localdimension for pension schemes, allowstheir marketing as local products in thecountries of origin, ensures compliancewith local legal or regulatory requirementsand potentially avoids discriminatorytaxation on cross-border contributions to,and payments of benefits from, pensionschemes.What is a pension poolingvehicle?A PPV is a category of vehicle exclusivelyused for pooling assets held by thevarious supplementary pension schemesof multinationals in order to achieveefficiencies at the level of• investment management• administration• custody• taxation.Who should be interested in establishinga pension pooling vehicle?• Multinational companies or largecompanies running several pensionschemes (multinational pooling);• Pension money asset managers(manager pooling);• Global asset allocation managers(multi-manager structures).17

LuxembourgInternational Pension VehiclesThe Pension pooling vehicle – how does it work?An example:Existing pension schemesof one multinational grouppension pooling vehiclesfor all group pension schemes underthe form of a Luxembourg UCIBenefits for pension funds andmultinational companiesThe pooling of assets of individualpension schemes in a common pool canprovide:• more efficient asset allocation for bothlarge and smaller pension schemes;UKpensionfundGermanpensionfundFrenchpensionfundSwisspensionfundUKpensionfundGermanpensionfundFrenchpensionfundSwisspensionfund• cost savings through economies of scalein the management, administration andcustody of these assets;• neutral tax treatment.pension pooling pehicleumbrella structureMore specifically, compared to multipleindividual pension schemes withoutpooling, pension pooling can achieve:Investments Investments Investments Investments(bonds, equities, cash, funds,hedge funds, private equity, etc.)Investments Investments Investments Investments(bonds, equities, cash, funds,hedge funds, private equity, etc.)• greater consistency in quality of assetmanagement and performance;• increased performance throughsecurities lending, trailer fees and othercommission mechanisms;• better control and oversight on a rangeof pension schemes with respect tomanagement and administration;• reduction in transaction costs and assetmanagement fees;• outsourcing of administrative androutine tasks;• simplified reporting from a single globalcustodian and administrator.18

Which legal structure for apension pooling vehicle?Luxembourg offers a variety of legalvehicles that may be used for pensionpooling. A particularly tax efficientvehicle is the UCI (undertaking forcollective investment):• The “fonds commun de placement”(FCP) has a track record for taxtransparency in relation to institutionalinvestors. The objective is to createa tax neutral structure, allowingmultinational companies/pension assetmanagers to ensure that each pensionscheme benefits, in the countries ofsource of its investment income, fromthe same tax treatment, including thebenefit of double tax treaties, as thatapplying when the pension schemedoes not invest through a poolingvehicle, and without an additional taxcharge caused by the Luxembourgvehicle.• Incorporated vehicles such as SICAVspresent an alternative, in the event thatthe participating pension schemes seekan investment in shares rather thanunits for local domestic tax reasonsand where the withholding tax oninvestment income is either irrelevantor identical whether the income isreceived by a SICAV or directly by thepension scheme. Withholding tax onfixed income securities is generally zeroor very low.Neutral tax treatment• Tax transparent vehicle (FCP)• Tax exempt vehicle• Zero subscription tax(taxe d’abonnement)• No Luxembourg withholding tax ondistribution• No capital gains tax for non-residents• Non significant capital duty (€ 1,250)• Management services exempt fromLuxembourg VAT• No Luxembourg transfer taxGroup insurance contractGroup insurance contracts are availableto finance the obligations fromoccupational pensions either in theform of direct insurance contracts orin the form of re-insurance contracts.Common to both types is the fact thatthe employer is the policy holder and theaffiliated member the insured person,and that the employer negotiates theterms of the policy with the insurer.A direct insurance contract providesfor a direct claim and for the paymentof benefits to the affiliated member orhis/her heirs, without involvement ofthe employer. This provides additionalsecurity to the employee and minimisesthe administrative burden on theemployer.A reinsurance contract is used by theemployer to ensure that funds areavailable to pay benefits to formeremployees as and when they fall due.Such contracts may fund liabilities infull or in part. In case of fully fundedobligations, the insurer may also makepayments directly to beneficiaries.Group insurance contracts can be usedto fund defined benefit and definedcontribution plans. In the case of finalsalary schemes, employers are requiredto pay additional premiums to fundsalary increases. Defined contributionplans are available as traditional withprofitspolicies or in the form of unitlinkedcontracts, where the investmentrisk is borne by the employee.Group insurance contracts are usuallygeared to one particular jurisdiction, toensure that benefits are optimised from19

a tax perspective. As a consequence, suchplans are usually standardised and offerlimited discretion to the employer.Group pension plans to provide pensioncover centrally to highly mobileemployees are also available; in thiscase attractive investment options andadministrative flexibility may prevail overtax efficiency in any given country.The principal advantage of groupinsurance contracts is that they arereadily available and enable smaller andmedium-sized employers to provideoccupational pensions. For larger,internationally active groups, they offera flexible instrument to complementthe main pension scheme in countrieswhere staff levels do not justify theimplementation of the group pensionfund.Pension trust solutionThe Luxembourg equivalent of trusts(or “fiducies” as they are called in French)are organised under the Law of July 27,2003.The Law provides a legal environmentand a high level of protection forLuxembourg trusts to the extent thatonly supervised professionals such asbanks, other financial intermediariesor insurance companies can becometrustees. The Law allows the setting up ofpension trusts according to continentalEuropean law (civil code).In such a structure, the employer(settlor or “fiduciant”) will pay monies(contributions) to a trustee (“fiduciaire”)and set conditions for the withdrawal ofassets by beneficiaries.By comparison with pension funds, thepension trust is even more flexible as itis not a supervised entity as such (onlythe trustee is supervised). This givestotal flexibility to the pension trust,for example in the area of investmentpolicy, amendment of the investmentpolicy or the surrender of pension rights.Registration of the pension trust with asupervisory authority and reporting to asupervisory authority are not required.The Luxembourg pension trust may bethe appropriate solution for expatriatepension plans where a maximum offlexibility is often required.20

LuxembourgInternational Pension VehiclesWhy Luxembourg?What are the success factors for afinancial centre to become a “centre ofexcellence” for pan-European pensionfunds? Ideally, you need:• an established financial centre withexpert knowledge in the differentfields covered by pension funds:asset management, custody, actuarialadvice, legal expertise, accountingand administration capacity,communication and IT facilities;• a stable fiscal and political environmentwhere it is easy to do business withoutunnecessary constraints;• a tax-neutral environment over the longterm: political and social stability is ofparamount importance;There is a financial centre that fulfilsall these criteria: the Grand Duchy ofLuxembourgLuxembourg has positioned itself overthe years as the financial heart of Europe.In the area of investment funds, theGrand Duchy holds 1 st place in Europeand 2 nd in the world, after the UnitedStates, with over 2,000 billion eurosunder management at 31 December2007. All the largest financial groups areCustodianCustody of assetspresent with highly-skilled internationalteams. Some already offer a globalpensions service, meeting the needsof umbrella pension funds (multicompartment,multi-employer), withweb-driven facilities and knowledge ofthe specific social, labour, investmentand communication rules operating indifferent European countries, as requiredby Directive 2003/41/EC.CoordinatorCovers risksInsurer• an international servicing centre whereteams are accustomed to workingin a multilingual and multiculturalenvironment;• a servicing centre with experience ofhandling cross-border business on aday-to-day basis. The cross-borderprovision of services is, in practice, aconsiderable operational challenge;• a domicile where the rules are strict, butare more qualitative than quantitativein application; where the supervisoryauthorities are rapid, pragmatic andefficient and able to operate in differentlanguages.AssetManagerInvests assetsPension fundEvaluates liabilitiesLiabilityManager21

Luxembourg has a flexible legalframework which meets internationalrequirements and is easily adapted todiverse international requirements.Luxembourg has a long history ofbeing an attractive investment centre:tax neutrality, combined with politicalstability to guarantee return oninvestments over the long term, areboth necessary for pension funds. Peopleworking in Luxembourg come from allover Europe, creating an internationalmelting-pot that is both culturallyrich and economically successful.Luxembourg has over two decades ofexperience in the business of crossborderinvestment fund sales and hasbeen active in the cross-border provisionof insurance products for many years.Last but not least, the pragmatism andefficiency of its supervisory authoritiesmake Luxembourg an ideal place to dobusiness.Combining all these elements makes fora compelling argument: Luxembourg isset to become the European centre ofexcellence for pan-European pensionfund administration and management.A final wordFull cross-border pension solutions,including asset and liability management,can be complicated if implemented fromscratch.Luxembourg offers a number of solutionsallowing for progressive, step by stepimplementation through pension pooling,Why Luxembourg?benefit pooling, pension administration,single-country pan European pensionfunds, etc.These solutions have a recognised trackrecord.Such step-by-step implementationcan be easier to manage and provideaccelerated savings.• Internationally recognised and reputable financial centre• dedicated, modern regulatory and tax framework for international pensionschemes• compatibility with other national legislations• flexibility in asset and liability management• fiscal neutrality• effective control• the world leader in cross-border fund distribution• expertise in foreign tax and regulatory reporting requirements• an established centre for multiple fund structures, requiring sophisticatedasset allocation• world class service levels throughout the value chain• Europe’s leading investment fund centre22

LuxembourgInternational Pension VehiclesGlossaryABO Accumulated benefit obligationALMasblASSEPDB schemeDC schemeCAACAA pension fundCSSFFCPIORPIORP DirectiveMember StatePPVAsset and liability managementAssociation sans but lucratifNon-profit making associationAssociation d’épargne-pensionPension Savings AssociationDefined benefit pension schemeDefined contribution pension schemeCommissariat aux AssurancesThe insurance supervisory authorityPension fund vehicle supervised by the insurance supervisory authorityCommission de surveillance du secteur financierThe financial supervisory authorityFonds commun de placementCommon investment fundInstitution for Occupational Retirement ProvisionDirective on the activities of Institutions for Occupational Retirement ProvisionCountry that is a member of the European UnionPension pooling vehicle23

LuxembourgInternational Pension VehiclesSCoSASEPCAVSICAVSIPUCISociété coopérative organisée comme une société anonymeCooperative company organised as a public limited companySociété d’épargne-pension à capital variablePension savings company with variable capitalSociété d’investissement à capital variableOpen ended investment companyStatement of investment principlesUndertaking for collective investment2000 Regulation Regulation by the Commissariat aux Assurances of 31 August 2000 creating the CAA pension fund2005 Law Luxembourg Law of 13 July 2005 implementing the EU IORP Directive.This amended the 1999 law which created the SEPCAV and the ASSEPLuxembourg for Finance thanks the members of the jointABBL/ALFI Pension Fund Working Group for their work onthis brochure.24

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