Though still in the early days of development, the proposed European Pension Fund (EPF) is at the core of detailed discussions and strategic planning in Luxembourg’s banking community, to meet a launch deadline which could be as early as the beginning of next year.

And Lucien Thiel, general manager of the Luxembourg Bank-ers’ Association, and one of the key figures involved in the fund’s promotion, feels there is no time to waste in tackling the issues at hand.

We have to solve three problems. One problem is to create the legal environment for the new vehicle, because the EPF will have its own judicial structure. It will be a new instrument which needs a new law. Secondly the problem of the taxation must be solved. And since we are not specialists in pensions funds or insurance we have asked an international consultant to evaluate the concept and to analyse if this concept fits with all the markets we want to reach.”

Whilst the legal issue is currently ”under way on a government level”, solving the tax problem has suffered a slight setback with a change of management of the tax authorities. “We will have a meeting with the new boss”, confirms Thiel, “but we know what they are thinking and obviously they are in favour.” At the root of the tax solution is the basic idea that the revenue of the asset manager will not be considered as a gain but will be transferred immediately into the reserve for the pensions, neutralising the revenues of the pension fund’s assets. “They have already shown that our idea how to solve the problem is not wrong” Thiel says, and as Luxembourg does not hold double tax treaties with all countries within the EU, the question of a non-taxable pension fund is vital for its international success. “If you want to handle international pension funds in Luxembourg you must avoid an additional cost element through local taxation.” he adds. But while the Luxembourg government will potentially lose out on one source of revenue, Thiel says they will benefit from another. “Those who manage the investment funds, be they banks, insurance companies or a new beast which will have a new name, will be taxed.” In turn, to supplement the tax incurred by the fund managers, a fee will be levied on the client which Thiel believes will be well worth the price. “If we offer the best quality, we can also take a certain price for it. For the beneficiary of the pension, it is not an additional charge. We are aiming at company pension funds, in which case you will have mass, and there the handling fees will not be a burden for the pension fund itself.”

The EPF, which is based on a mix of asset management and insurance, will sustain a degree of investment flexibility to incorporate the requirements of different EU member states and fund promoters. So, Thiel says, an institution will be able to either delegate all investment de-cisions to the pension fund administrator or will be able to stipulate the exact breakdown of asset allocation. The funds will be able to be issued by existing banks or insurance companies, who will have to partner each other in terms of individual expertise, while a new body will need to be created to govern the “new profession.” And a new profession will eventually mean new skills to be learnt and taught. “We still need to improve our insurance professionalism and we need the knowledge imported from abroad, and we are aware of this”, he says.

The Luxembourg Institute of Training in Banking is already in the course of setting up a training programme especially for pension fund managers, due to begin this autumn. The programme will focus on “back office people” as well as middle management. Top management will be imported while local middle management down will receive “rapid training”.

But there is still one issue which could call a stop to the whole project and it is out of Thiel’s hands. The question of European harmonisation and the free circulation of pension funds as well as life insurance was raised unsuccessfully in 1993 by the EC Commission. Certain countries insisted on imposing in-vestment restrictions on the funds, stating that a certain proportion of assets had to be ploughed back into their economy. And Thiel is well aware that a repeat incident is the one single factor which could prevent the EPF from becoming a reality. “The decisive factor is the one we are not able to handle and this is the harmonisation on the European level. We need this to develop this new product.”

With the Green Paper on retirement income due to come out soon from Commissioner Mario Monti, Thiel is hopeful that it will start the ball rolling on abolishing those national restrictions. “If you have a single market, you must forget all your national thinking”, he argues. “It is impossible to impose national restrictions when you have a market which tomorrow also has a single currency.”

Thiel does not believe that there will be another 1993 incident, as those countries who were making the demands are now realising the need to invest outside of the state. “The French already in their new law on pension funds, saw that they had to open it, because the initial idea was to oblige a company to reinvest the pension fund in its own structures. This doesn’t work as you have no guarantee in case of failure that the money will be safe. They have already recognised that you must be free to invest your money where you want to invest - the Italians too.”

Discussions continue in Luxembourg and while the general consensus within its banking community views the fund as an essential element to a single European market, the buck appears to lie with a pan-Europe departure from nationalistic thinking.

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