Luxembourg's experience in de-veloping a credible European pension fund will be a good indicator of the potential for outsourcing. Luxembourgers are hoping it will help create another Ucits-type boom, but according to Patrick Zurstrassen, managing director of Crédit Agricole Indosuez, you could ask 100 bank-ers and you wouldn't be able to get a definitive answer. "

The Luxembourg pension aims to attract non-Luxembourg pension funds to domicile in the jurisdiction. And from one centre, funds will be able to sub-contract the management and administration. The Grand Duchy certainly has the tradition of being at the cutting edge of developments in administration services. Banks such as Crédit Agricole Indosuez with its cloning systems and First BIL with its licensing of 'Hub & Spoke' have set the trend for systems-led economies of scale. Banque Ed-mond de Rothschild has devised a similar pooling system which will form the basis of the bank's moves into serving multinational pension funds.

Thomas Seale, chief executive of European Fund Administration (EFA) says, "Ideally we need a directive for a pan-European structure. However, the Luxembourg vehicles could be a very good format for this." For it to work Seale says, "Europe needs a company to test the Luxembourg ap-proach, thereby pushing regulatory limits in order to make progress."

The Luxembourg pension concept skirts around the issue of unifying different national systems and although it may not appeal to the purists, it is a pragmatic solution and it could work. Despite their initial intention of constructing a universal pension fund, the Luxembourg Bankers Association (ABBL), which sponsored the idea, found the combination of capitalisation and book reserve systems was not surprisingly unworkable within a single legal entity. The compromise - two legal forms - is only barely credible at this stage and will need a few brave companies to step forward and test it before the Luxembourg funds service industry stakes its own credibility by fully backing the idea.

The pension law initiative presents opportunities in particular for those administration firms with a transfer agency capability. Since BIL established its stand-alone TA business FETA five years ago, the bigger players have concentrated on developing this expertise. The EFA venture re-sulted in part from the realisation that the individual partner banks could not afford the investment in systems re-quired to build the TA capability, when you consider it would cost them $5-10m a year in technology upgrades.

Seale suggests that success in the administration business is a question of scale, and that a service provider would need at least 300 funds on the system to achieve critical mass. EFA aims to have 600 by the end of next year. Local competition knows that if the EFA venture works, it could mean big business for the centre as a whole.

Luxembourg's proactive response to the pensions opportunity has given the administrators reason to invest in systems and is forcing fund promoters to reassess their administration relationships. "I do expect significant outsourcing to result," says Seale. "One main reason is the current movement by regulatory bodies to ensure that fund administration is conducted at arms length from portfolio management and, in some countries, the depositary function. Another main reason is technology costs. At EFA we are investing heavily in state of the art systems, which only a large player can do. Also, fund admin is simply not the expertise nor the domain of banks."

State Street's Tim Caverly is confident his group can benefit from its global presence and transfer technology innovation from the US: "You'll see the big global players and the international banks linked via the latest technology. They may not have direct distribution at this stage, but that will develop, and we will see more sophisticated products. Our job is simply to support it all"

Operators in Luxembourg are already free to work on behalf of expatriate staff of multinational companies. From next year, the same rules will apply to European multinationals looking to benefit from the introduction of the single currency to give all their employees on different national sites the benefit of a single pension fund denominated in Euros.

Marie-Jeanne Chevremont of Coopers & Lybrand says, " I think Luxembourg is ahead of the game in terms of developing a European and global perspective on administration and shareholder servicing. When you have multinational investors with a variety of reporting requirements, there are not too many centres that can offer global servicing.""

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