In becoming the world’s second largest investment fund centre, Luxembourg proved itself not only a canny operator but also one step ahead of its European counterparts. With the creation of the so-called ASSEP (Association d’Epargne Pension) and SEPCAV (Société d’Epargne Pension), there’s a distinct feeling history is repeating itself.
In short, the ASSEP is an association of people entitled to a pension on retirement, whereas in a SEPCAV the members are in effect shareholders. Whilst the SEPCAV is a solely defined contribution vehicle, the ASSEP and the new insurance pensions can be both defined benefit and defined contribution. Uptake on the two vehicles has been relatively slow but this is to be expected. Talk to anyone in Luxembourg about this and they remind you how long it took the investment fund industry to get off the ground.
The EC’s draft directive on supplementary pensions, published at the end of last year, is far from perfect but it suggests the notion of a pan-European pension fund network is now inevitable.
And, just as Luxembourg prepared itself for the investment funds directive, so it has done the same for pension funds. Once there is an EU directive on supplementary pensions that tackles tax issues or once there is a successful test case at the European Court of Justice, the Luxembourg pension market should take off, as the 1999 legislation is a direct attempt to turn the country into a major pensions centre.
Luxembourg became an offshore centre in the 1980s, thanks to the lack of a level playing field. But this is now changing rapidly, since monetary union has obliged players in Luxembourg to think about new strategies and products.
Pension funds are considered an interesting product since Luxembourg’s central European location gives it a unique catchment area.
It just so happens that Belgium, France, Germany and Italy, all with highly developed pay-as-you-go systems, are nearby.
Under the new legislation decision-making for the ASSEP and SEPCAV lies with Luxembourg’s financial watchdog, Commission de Surveillance du Secteur Financier (CSSF). A promoter can appoint the board of an ASSEP or SEPCAV, select the contribution or benefit level, lay out an investment structure and submit it to the CSSF, which will then judge it on a case-by-case basis. Luxembourg’s Commissariat aux Assurances (CAA) has also launched a Grand Ducal decree allowing insurance companies to promote pensions.
To the cynical, these new fund types probably appear little more than niche schemes. Taken in perspective though, they are considered by some as a good omen and a bold adaptation of the 1999 legislation.
There have been some amendments introduced by the relevant authorities this year to the 1999 legislation, including the fact that companies can now provide seed money at the inception of a fund to ensure diversified asset management from the offset, and as new members join, so an employer’s initial payment is gradually reduced.
Significantly, the Luxembourg authorities say they are now trying to improve fiscal transparency and the acceptance of the pension fund vehicles in other countries through the exchange of information.
While to date only a handful of pension funds have been granted approval under the 1999 law, more than half a dozen more have been submitted for inspection, with several more in the planning stage.
The new legislation and subsequent establishment of the ASSEP and SEPCAV vehicles has brought in – as is to be expected - a wave of interest from consultants eager to gain business as Luxembourg’s relatively small pension fund industry gathers momentum.
But interestingly, it is smaller consultancy firms, JBI Associates, Barnett Waddingham, Pecoma, Ebica and Actualux, that are vying for attention, and not the main players you’d usually expect to see, even though PricewaterhouseCoopers supervised the creation of the country’s first ASSEP for Anglo-Dutch group Unilever. But if the market takes off as predicted, competition will become fierce as the large international consultancy groups will want their bite of the cherry.