Pension investors worth $1.5trn (€1.4trn) have called on the OECD to ensure a new tax framework does not result in a two-tier tax system for those managing retirement income.

Pension and sovereign investors – including APG, PensionDanmark, PGGM, the Universities Superannuation Scheme and the Canada Pension Plan Investment Board – asked the OECD to proceed with caution when drafting its proposed model tax convention, drawn up by the think tank as part of its work with G20 nations around base erosion profit shifting.

The new convention aims to remove inconsistencies hampering pension funds’ ability to establish their country of residence due to the numerous bilateral tax agreements struck between nations, allowing investors to more easily reclaim tax.

The global pension fund coalition, comprising 15 pension managers and sovereign investors*, said it was important the convention’s definition of pension funds capture the “diverse range” of pension providers.

Particularly, respondents to the OECD’s consultation questioned wording that pension funds should be treated “as a separate person” under taxation laws.

The Association of Global Custodians stressed that the ‘separate person’ rule would see a number of pension providers – such as UK contract-based arrangements offered by insurance companies, or German contractual trust arrangements, used by companies to pre-fund book reserve pension obligations – no longer qualify as pension funds, leading to an “inappropriate” outcome.

It added: “The approaches used by different states to accord ‘pension fund’ status to vehicles established in those states differ enough that a blanket requirement that an arrangement constitute a ‘separate person’ for tax purposes will likely inappropriately exclude certain pension fund arrangements.”

The coalition of 15 pension funds shared the concerns, noting the inclusion of ‘separate’ would introduce a new concept into tax law that would be difficult for some pension funds to disprove in certain OECD member states.

The coalition further urged the OECD not to define pension funds as entities “operated exclusively to administer or provide retirement or similar benefits”, warning that some providers may provide services “complementary or related” to providing retirement benefits.

“Such activities often serve a social and public purpose, but not all OECD member states may capture these activities under the phrases ‘providing retirement benefits’ or ‘similar benefits’,” the coalition’s response said.

ATP, Denmark’s statutory pension fund, also took issue with the inclusion of “exclusively”, noting that it had in the past been asked by the Danish government to manage other benefits, such as survivor benefits. 

It added: “To be certain that the word ‘exclusively’ is not interpreted in too narrow a way and thereby exclude persons or entities with other or multiple pension and savings activities from the definition of a recognised pension fund, we suggest rephrasing the wording to ‘exclusively or almost exclusively’ in the necessary places in the articles or in the commentaries of the OECD Model Tax Convention.”

The coalition endorsed the proposed use of “exclusively or almost exclusively”, noting the use of the phrase within Dutch law.

It noted that a Dutch exemption from corporation tax was only extended to pension funds that “exclusively or almost exclusively provide benefits for […] disability or old age, based on a pension scheme”.

*The global pension fund coalition includes Alberta Investment Management, Arbeitsgemeinschaft kommunale und kirchliche Altersversorgung, APG, British Columbia Investment Management, Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board, the New Zealand Superannuation Fund, OMERS, OPTrust, the Ontario Teachers’ Pension Plan, PensionDanmark, PGGM, the PSP Investment Board, QIC and the Universities Superannuation Scheme

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