When Luxembourg decided to break into the pensions provision market two years ago, it did so in style covering as many contingencies as possible by launching two vehicles- the ASSEP and the SEPCAV. Lucien Thiel, general manager at the ABBL, Luxembourg’s Bankers’ Association, says the idea was to provide a versatile framework that pension funds can adapt to their specific needs. “If you want to serve several countries you must have a very broad and open approach as each country has its own traditions, its own solutions and its own regulation,” he says.
Then, last August the Luxembourg’s insurance regulators the Commissariat Aux Assurances (CAA) secured a Grand Ducal decree allowing insurance companies to provide pension funds, thereby giving an even wider choice. Given the quest for versatility and universal coverage, it’s no surprise there is overlap between the schemes. Nevertheless, there are significant differences that anyone considering a Luxembourg pension scheme should know about. Although the three vehicles have a relatively loose construction and are open to subjective interpretation, each has idiosyncrasies that will appeal in varying degrees to different people.
Differences and similarities are listed in the table below. Most important and relevant to prospective users are the varying investment policies. Luxembourg’s banking regulator, the CSSF, is overseeing the ASSEP and SEPCAV and has taken a liberal line with little or no reference to investment restrictions- the approach is similar to the ‘prudent man’ principle and pension fund managers are told they must ‘diversify’. Not that this is carte blanche to pile in to alternatives. Submissions to the CSSF will be treated subjectively, on a case-by-case basis and hypothetically, two pension funds with identical investment strategies but differing assets may potentially find the CSSF granting a license to one but not the other.
In contrast, the insurance pension fund is more stringent in its guidelines and restrictions are clearly laid out and based on existing insurance laws. “There’s an intellectual supervisory difference. The insurance regulators here take a reasonably conservative line on underlying investments,” says James Ball, head of consultants JBI Associates. The guidelines are far from set in stone though and the CAA is relatively flexible. Nevertheless, any potential pension fund user has to get special dispensation from the association if it wants to err from the specified percentages. Similarly the CAA requires solvency for its pension funds whereas there is no such requirement for SEPCAVs.
ASSEPs and SEPCAVs also have different legal entities. The former are associations of people with a right to receive a pension on retirement and the members are essentially creditors of the fund. SEPCAVs are like a SICAV, an investment fund concept, and employees are similar to shareholders, the only proviso being they cannot sell shares before retirement. All three are licensed by the ministry of Treasury, but the ASSEP and SEPCAV are supervised by the CSSF and the CAA supervises the insurance pension fund. While the SEPCAV is solely a defined contribution vehicle, both the ASSEP and the insurance pension fund have greater versatility in that they can be either defined benefit or defined contribution.
ASSEPs and SEPCAVs need to employ a Luxembourg bank as a custodian whereas an insurance pension fund can employ any EC bank as its custodian and, if it wants more than one, so be it. According to Claude Wirion of the CAA, insurance companies have for the past 10 years been able to deposit assets anywhere in the European Union. Estimates from the CAA suggest about 70% of insurance assets have remained in Luxembourg despite this freedom of choice and Wirion believes the lack of restrictions has been a major incentive for insurance companies to locate in Luxembourg. “This too will be true for pension funds in Luxembourg,” he says.
In contrast asset managers for ASSEPs and SEPCAVs can reside outside the country while their counterparts at the insurance pension funds must be domiciled in Luxembourg. All of which appears to count against the new insurance pension funds. Yet, it has its own advantages, one being that it lacks any minimum amount of net assets- SEPCAVs require a minimum of E1m within two years and ASSEPs require pension provisions of E5m within 10 years.
Another major difference between the two groups is solidarity between compartments. According to Phillipe Léonard, a director of ABN Amro Life and Pensions and head of new pension consultancy EBICA, with the two bankers’ models it is necessary to specify the number of compartments at the beginning. Once the number is established and the compartments filled, so there is no solidarity between the units. In practice this means that if one compartment manager performs poorly while another outperforms, there’s no cross subsidising, the compartments are mutually exclusive.
With the insurance model there is solidarity between the different cells. (Another way of looking at it is that the ASSEP and SEPCAV are essentially umbrellas for a series of individual funds). This may produce a quandary for pension fund members once a scheme has numerous members. Léonard uses multinationals as an obvious example: “suppose that you are in very good shape and you have to finance your competitor who is also in another compartment. I think this might be a problem,” he says.
Another attribute of Luxembourg is the plethora of double tax agreements- thanks largely to the investment fund industry. Léonard says Luxembourg has such agreements with every European country and during the latest tax renegotiation with Canada, there were references specifically to both ASSEPs and SEPCAVs. According to Wirion, the bankers’ and insurance models are the came from a fiscal point of view. “Both are tax neutral, so there’s no taxation when the sum is paid out to non-residents. As for tax relief on contribution paid, this is up to the country of the policyholder or of the employer to decide,” he says.
For legislation constructed so hastily, there are bound to be slight inconsistencies and shortcomings. ASSEPs and SEPCAVs are no exception and potential promoters should be aware of potential hitches. Ikram Shakir, managing director at consultants Barnett Waddingham, praises the Luxembourg authorities for their innovation, but in pitching the product (in this case a SEPCAV) to clients, there are a couple of issues they are consistently uneasy with. At present those setting up a fund must publish the scheme rules. “On the face of it it looks wonderful and very secure. But the problem is that in the scheme rules you have contributions which means the employer has to disclose the contributions he will be making to these schemes. For public quoted companies, this kind of information is very sensitive,” he says. There are amendments to the legislation going through parliament and this requirement is under review.
The second problem is more a commercial issue. Both ASSEPs and SEPCAVs are controlled by their members- they appoint the directors etc. Shakir says the problem arises if you are trying to market a multi-compartment or a multi-employer fund. At the moment it is difficult to establish who has what say as there is no independent institution to ascertain the corporate structure of the fund. There’s also the question of establishing by which means size is determined. Is it for example, the company paying the greatest contribution (not necessarily the largest employer) or is it the scheme with the most members? Specifics on such matters are missing but the CSSF has said it is addressing this.
To date the ASSEP and SEPCAV vehicles have greater resonance than the insurance equivalent, not least because they are more established, and the CSSF has granted licences for three funds. Last year Anglo/Dutch group Unilever became the first company to launch an ASSEP and three months later, Alliance, the Dubai-based insurance company registered the country’s first SEPCAV with the help of consultants Barnet Waddingham. Most recently, Lombard International launched a SEPCAV on behalf of the accountants and consultants KPMG.
Nevertheless, the CAA’s equivalent is far from a poor relation and will in time square up to the bankers funds. Wirion is optimistic about the prospects for the Luxembourg market and the shift from public to private provision. In the last decade, for example, premium income has grown 40 fold and Wirion says the latest developments in the Luxembourg pensions market are promising. Fernand Grulms, head of the newly-created pensions consultant Pecoma, says it’s too early to pass judgement the insurance pensions, after all, they were only introduced in August. Under certain circumstances though (cross-border for example) he believes the insurance fund might be more appealing as there is an existing EC directive for insurance products.
The insurance pensions vehicle applies quantitative restrictions, rather than following the ‘prudent man’ principles adopted by the other schemes. The aim was to keep these minimal and there are just a few where quantitative restrictions apply. There is a restriction on the amount that can be invested in any one issuers’ shares, and not just the paper of the plan sponsor, as is the case with the banking sector plans.
There can be up to 100% investment in equities, provided these are quoted and are invested in shares of companies within the OECD.
The insurance pension plan does have a catalogue of assets that can be invested in, but there are derogations that can be obtained from the Commissariat. The policy is to look constantly at the new financial products being developed to see how they can be included as far as possible in the existing investment classifications.
Another contrast with the SEPCAV and ASSEP is that the insurance plan does not distinguish between the asset manager and the liability managers, as these vehicles do. There is just one general manager appointed, who may delegate sub-functions to an asset and liability manager. The idea is to have one manager who has control over the pension fund.
It is possible to consider private equity and hedge funds within portfolios, but contact with the Commissariat is usually needed.
The three schemes are designed to accommodate employees from numerous countries and as such, their construction is deliberately loose to ease their adaptation to various laws. Although there are tangible differences between the three pensions vehicles, this should be seen as an attribute, a demonstration that both providers are pulling in the same direction.

Topics