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Pension funds and international pension vehicles

Luxembourg has long held the ambition of positioning itself as a centre for the management and administration of cross-border pension vehicles, as it believes in the future development of pan European pension funds which present major advantages for multinational companies, such as

  • greater consistency in quality of asset management and performance;

  • increased performance through securities lending, trailer fees and other commission mechanisms;

  • better control and oversight on a range of pension schemes with respect to management and administration;

  • reduction in transaction costs and asset management fees;

  • outsourcing of administrative and routine tasks;

  • simplified reporting from a single global custodian and administrator.

 

As well as offering a variety of legal vehicles for pension fund pooling, Luxembourg is an established centre for investment fund management and administration.

Three Luxembourg structures allow a sponsor to establish a pension funding vehicle within the meaning of 2003 European Directive on pension funds (Directive on the activities of Institutions for Occupational Retirement Provision - IORP). Aspiring to attract foreign employers/sponsors, the characteristics of the Luxembourg legislation allow a high degree of flexibility in plan design and the investment of plan assets.

Two pension fund vehicles are regulated by the financial supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF):

  • SEPCAVsociété d’épargne-pension à capital variable (pension savings company with variable capital). This vehicle, which is similar to the SICAV, can only be used for defined contribution (DC) schemes.

  • ASSEP Association d’épargne-pension (pension savings association). This vehicle is suitable for both DC and/or defined benefit (DB) schemes. It is able to pay out a lump sum or an annuity and may also pay ancillary benefits such as death in service, disability pension and payments to widows and orphans.

A third pension fund vehicle is regulated by the insurance supervisory authority, the Commissariat aux Assurances - CAA. The CAA pension fund is suitable for DC, DB and/or supplemental benefits in case of death or disability of members. It has a choice of four legal structures, but in practice the asbl, a non-profit making association, is the most commonly used.

All three vehicles can be organised as an umbrella structure: different share classes can be used to separate investment styles (DC plans) or different types of plan (DB and DC schemes), or where differing social and labour law provisions make this necessary. All three types of fund can be organized as a “multi-employer” scheme.

The following flyer How to set up an international pension fund vehicle provides more details on pension pooling and other international pension fund solutions.

latest developments: review of the European Pension Framework

On 7 July 2010, the European Commission has launched a Europe-wide public debate on how to ensure adequate, sustainable and safe pensions and how the EU can best support the national efforts.

The Green Paper reviews the European pension framework in a holistic and integrated manner, benefiting from synergies across economic and social policy and financial market regulation which is why so many different topics are covered, such as: longer working lives, the internal market for pensions, mobility of pensions across the EU, gaps in EU regulation, the future solvency regime for pension funds, the risk of employer insolvency, informed decision-making and governance at EU level.

In particular, it aims to address the following issues:

  • Ensuring adequate incomes in retirement and making sure pension systems are sustainable in the long term

  • Achieving the right balance between work and retirement and facilitating a longer active life

  • Removing obstacles to people who work in different EU countries and to the internal market for retirement products

  • Making pensions safer in the wake of the recent economic crisis, both now and in the longer term

  • Making sure pensions are more transparent so that people can take informed decisions about their own retirement income

The latest developments and texts are published on a dedicated website of the European Commission.

ALFI has released its global pension fund report, “Beyond their borders: evolution of foreign investment by pension funds,” produced by PwC Luxembourg.

The report - which looks at the growth of pension funds globally, the asset allocation of pension funds on a regional basis and the foreign investment of pension funds - found that South America’s pension funds showed the highest growth rate globally, with assets soaring from USD 184 billion (bn) in 2008 to USD 528 bn in 2014, a 19.2% compound annual growth rate (CAGR).

In terms of investing overseas, foreign investment for the pension funds of the majority of OECD countries (excluding the US) accounted for about 25% on average of their total pension investments in 2008, but jumped to almost 31% in 2014.  

Find more information here.

Updated on 19/10/16  
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