Download Assumes no US plan participation

PN091250055
WORKSHOP 28: POOLING OF
PENSION FUND ASSETS
27TH May, 2009 | 11:15 – 12:30
Corinne Merla (Belgium); Brian Buggy (Ireland);
Wijnanda Rutten (The Netherlands); Philip Bennett (UK); Howard Pianko (USA)
Note: Our thanks to Jacques Elvinger of Elvinger Hoss & Prussen, Luxembourg, who has reviewed the summary of the
Luxembourg law position in these slides
Part 1:
Introduction: Why Bother?
1
Part 1: Introduction: Current Position
Diagram 1
Multinational Employer Group
Pension Fund 1
Pension Fund 2
Pension Fund 3
Custodian 1
Custodian 2
Custodian 3
Investment
Manager 1.1
Investment
Manager 2.1
Investment
Manager 3.1
Investment
Manager 1.2
Investment
Manager 2.2
Investment
Manager 3.2
Investment
Manager 1.3
Investment
Manager 2.3
Investment
Manager 3.3
2
Part 1: Introduction: Desired Position*
Diagram 2
EU Employer Group
Pension Fund 2
Pension Fund 1
Pooling Vehicle
Equity SubFund
Equity Manager
1
Equity Manager
2
Sub-Custodian 1
Pension Fund 3
Custodian
Bond Sub-Fund
Bond Manager
1
Bond Manager
2
Sub-Custodian 2
*Assumes no U.S. plan participation
3
Part 1: Introduction: U.S. Master Trust Structure
Diagram 3
U.S. Employer
U.S. Pension
Fund 1
Investment Committee
U.S. Pension
Fund 2
U.S. Pension
Fund 3
Master Trust
Master Trustee
Equity SubFund
Equity Manager
1
Equity Manager
2
Sub-Custodian 1
Bond Sub-Fund
Bond Manager
1
Bond Manager
2
Sub-Custodian 2
4
Part 1: Introduction: Desired Position with U.S.
multinational overlay
Diagram 4
U.S. Parent Company
EU Company 1
EU Company 2
U.S. Company 1
U.S. Company 2
EU Pension
Fund 1
EU Pension
Fund 2
U.S. Pension
Fund 1
U.S. Pension
Fund 2
Investment
Committee
Master Trust
Management
Company
Pooling Vehicle
Equity Sub-Fund
Equity Manager 1
Equity Manager 2
Sub-Custodian 1
Custodian/Master
Custodian
Bond Sub-Fund
Bond Manager 1
Bond Manager 2
Sub-Custodian 2
* If the parent of the multinational employer group is a U.S. entity, the developing model addresses ERISA by structuring the pooling vehicle and the commingled
sub-funds to comply with ERISA (a “safe harbor” approach). If the parent of the multinational employer group is a non-U.S. entity and a “safe harbor” approach is
not adopted, the pooled vehicle and the commingled investment sub-funds could be subject to ERISA if 25% or more of their respective assets are attributable to
U.S. benefit plans.
5
Part 1: Introduction: Hoped-for efficiencies
Source of
Efficiency
1.
2.
Investment
management
fees
Custodian
Existing Position
Use of Pooling Vehicle
1.1 Each pension fund
appoints its own investment
managers
1.2 More investment
management agreements,
so more management time
and legal fees and higher
management fees
1.3 Multiple investment
managers
1.1 Reduction in number of
investment managers
2.1 Each fund appoints its
own custodian
2.2 More custodian
agreements, so more
management time and legal
fees and higher custody
fees
2.3 Multiple custodians
2.1 Reduction in number of
custodians
2.2 Reduction in number of
custody agreements
1.2 Reduction in number of
investment management
agreements
Comment
1.1 Possible for sponsoring
employer group to achieve
number of the savings if
pension funds used the same
investment managers (as fees
can be negotiated on a bulk
basis)
1.3 Volume discount on
investment management fees.
Savings in legal fees and
management time
2.1 Possible for sponsoring
employer group to achieve
number of the savings if
pension funds used the same
custodian managers (as fees
can be negotiated on a bulk
basis)
2.3 Volume discount on
custodian fees. Saving in
legal fees and management
time
6
Part 1: Introduction: Hoped-for efficiencies (cont'd)
Source of
Efficiency
3.
Governance
Existing Position
3.1 Higher consumption of
management time in relation to
investment matters for each of
the different pension funds
3.2 Dilution of available internal
investment knowledge and
expertise
3.3 Duplication of purchase of
investment consulting services
Use of Pooling Vehicle
3.1 Group investment
expertise can be focused in
governance committee of
pooling vehicle
Comment
Pooling vehicle has a clear
advantage (if not outweighed by
disadvantages)
3.2 Better use of management
time
3.3 De-duplication of
investment consulting advice
4.
Reduction in
dealing costs
4.1 Each pension fund will have
to buy or sell investments
separately
4.2 In some cases, one pension
fund will be selling the same
shares (to raise cash) at the
same time as the other pension
fund is buying shares
4.1 Transactions are, by
definition, aggregated via
pooling vehicle
4.2 Funds wishing to withdraw
cash can net against funds
wishing to invest cash with only
the net position then giving rise
to a transaction external to the
pooling vehicle in buying or
selling investments
Pooling vehicle has a clear
advantage
7
Part 1: Introduction:
But watch out for potential inefficiencies
–
–
–
–
Pooling may increase legal compliance responsibilities and risk due
to overlay of different legal systems (e.g., E.U. IORP and U.S.
ERISA); complicates administration of pooling vehicle and increases
legal risk and cost
Possible disconnect between local country finance and HR functions
and parent entity personnel responsible for pooling vehicle
investment decisions
Concentration of assets within the pooling vehicle structure could
decrease diversification and increase risk exposure in a turbulent
economy
Not a “holy grail”; can’t freely apply overfunding in one plan to offset
liability in another
8
Part 2:
Introduction to types of
pooling vehicles
9
Types of pooling vehicles
Country
Name of vehicle
Brief description of vehicle
1.
Belgium
Organisme de placement
collectif institutionnel (OPC)
Tax transparent fund for collective investments. Structured
as a UCITS or a common investment fund (FCP). New
vehicle since 18 December 2007. Very flexible regime.
Access restricted to institutional and professional investors.
May be set up by only 1 investor.
2.
Ireland
Common contractual fund
(CCF)
A tax transparent vehicle. Contract based (not a separate
legal entity). Established by a management company
under which investors by contractual arrangements
participate and share in the property of the fund as coowners of the assets of the fund. The CCF must comply
with the investment objective, policies set for it and the
restrictions of the UCITS or non-UCITS rules applicable to
it. The assets of the CCF are held by a custodian. The
custodian is a party to the Deed of Constitution.
10
Types of pooling vehicles (cont'd)
Country
3.
Luxembourg
Name of vehicle
Fonds commun de
placement (FCP)
Brief description of vehicle
Tax transparent fund for collective investment.
Contract based (not a separate legal entity). Established
by a management company under which investors by
contractual arrangements participate and share in the
property of the FCP as co-owners of the assets of the FCP
(but the co-owners have limited liability in the sense that
they can only lose the amount invested in the FCP). The
assets of the FCP are held by a custodian which is
normally party to the management regulations as its
appointment by the management company is a precondition for any participant subscribing in it.
Note: Can be established:
– under Part I of the Luxembourg law of 20th December, 2002
regarding undertakings for collective investment to qualify as an
Undertaking for Collective Investment in Transferable Securities
("UCITS") under the EU Directive 85/611/EC (as amended), or
– under Part II of the 2002 law, or
– under the law of 13th February, 2007 regarding Specialised
Investment Funds.
11
Types of pooling vehicles (cont'd)
Country
Name of vehicle
Brief description of vehicle
4.
The Netherlands
Fonds voor Gemene
Rekening (FGR)
Tax transparent mutual fund for collective investments
5.
UK
Pension fund pooling
vehicle (PFPV)
See Note 1
Must be established as a trust which would amount to a
"unit trust scheme" (but which is then de-natured as a unit
trust scheme for tax purposes by the Income Tax (Pension
Funds Pooling Schemes) Regulations 1996. Unitholders
are limited to UK registered pension schemes, "Section 615
funds" and recognised overseas pensions schemes.
Operator (usual trustee) of a PFPV will require
authorisation to undertake this activity under the Financial
Services and Markets Act 2000 . In practice, cannot invest
directly in land or buildings, tangible assets (e.g. works of
art or gold bars) or insurance contracts
Investments in limited partnerships may be possible so long
as the property of the limited partnership is one in which a
PFPV could invest in directly
Note 1: The PFPV has not, in practice, been used for a cross-border pension fund asset pooling and so is not
considered further (because of problems with tax transparency in relation to non-UK investments and non-UK tax
authorities.
12
Types of pooling vehicles (cont'd)
Country
6.
USA
Name of vehicle
Brief description of vehicle
– No specific vehicle for crossborder pension investing has been
established; no prohibition against
cross-border pooled investments
exists either. See Note 2.
– U.S. employers typically use a
master trust to commingle assets
of group’s U.S. plans for
investment.
– Some U.S. based global
custodians are developing
vehicles for global pooling.
– In the master trust structure, an ERISA fiduciary (typically an
investment committee appointed by the parent entity) directs the
master trustee as to the sub-funds to be established, appoints the
investment manager of each sub-fund and allocates assets on a plan
by plan basis among the sub-funds. All of the assets in the master
trust are treated as “plan assets” under ERISA
– A recent Advisory Opinion published by the U.S. Department of
Labor has been referenced as evidencing regulatory approval of a new
cross-border investment vehicle. Others assert that the Advisory
Opinion represents no change. For a U.S. multinational entity, the
developing global pooling structure adopts a “safe harbor” approach
treating all commingled subfunds as subject to ERISA, e.g.
ERISA’s “indicia of ownership” rules restrict how
investments may be held outside of the U.S.;
ERISA’s “plan asset” rules apply;
ERISA’s prohibited transaction rules apply; and
all managers of the sub-funds are “investment
managers” as defined under ERISA.
Note 2: A US master trust may only hold assets of certain US retirement arrangements (i.e. code section 401(a)
tax qualified plans, IRAs and governmental plans) to benefit from US tax exemptions
13
Part 3:
Legal and tax constraints
14
Legal and tax constraints: overview
– Can the pension fund invest in the pooling vehicle?
– Restrictions on marketing the pooling vehicle to the
pension fund
– Constraints imposed by the legal structure of the
pooling vehicle
– Constraints imposed by the regulatory regime of the
country of establishment of the pooling vehicle
– Tax hurdles
– Legal risk
15
Constraint 1: Can the pension fund
invest in the pooling vehicle?
EU Multinational
EU Pension
Fund 2
EU Pension
Fund 1
Other assets
Units (see
Note 1)
Units (see
Note 1)
U.S. Pension
Fund*
Trust or
Master
Trust*
Other assets
EU established pooling
vehicle
Equity Sub-Fund
Equity Manager 1
Equity Manager 2
Sub-Custodian 1
Investment
Committee
Custodian/Master
Custodian
Bond Sub-Fund
Bond Manager 1
Bond Manager 2
Sub-Custodian 2
Note 1: The pooling vehicle can issue 2 or more different classes of units linked to different sub-funds established by the pooling vehicle to
allow each investing pension fund to choose an asset allocation suitable to its investment strategies.
*Note 2: ERISA does not prohibit cross-border investing, however, if a U.S. plan participates in this structure and a “safe-harbor” ERISA compliant
structure is not adopted, separate analysis would be necessary to determine whether 25% or more of the assets in the pooling vehicle (and each
sub-fund) comes from one or more U.S. benefit plans.
16
Constraint 1: Can the pension fund
invest in the pooling vehicle? (cont'd)
Country of
establishment of
pension fund
Restrictions as
to type of
investment that
may be held
Restrictions as to
percentage of
portfolio invested
in particular
investments
Currency
restrictions
Other
1.
Belgium
None specific –
prudent man rule
UCITS –
restrictions may
be applicable
Investments in the
sponsoring
company: max 5%
Maximum 10% in
companies
belonging to same
group
None
No
2.
Ireland
None if QIF*
Yes, if UCITS
(limitations under
UCITS Directives
– e.g. no property
or commodities)
QIF – None
UCITS – investment
restrictions
None
No
* A Qualifying Investor Fund where the minimum investment is €250,000 and the investor has assets of €25,000,000.
17
Constraint 1: Can the pension fund
invest in the pooling vehicle? (cont'd)
3.
Country of
establishment of
pension fund
Restrictions as
to type of
investment that
may be held
Restrictions as to
percentage of
portfolio invested
in particular
investments
The Netherlands
None specific as
far as the
investment
portfolio as a
whole is prudent
UCITS restrictions
may be applicable
None specific, but
there are limitations
to (in) direct
investments in the
sponsoring company
Currency
restrictions
None
Other
No
Note 1: Watch out for Article 18(1)(c) of the IORP Directive (which applies to EU established pension funds):
“assets shall be predominantly invested on regulated markets”
Note 2: EU established pension funds will need to comply with Article 18 of the IORP Directive as
implemented in the EU country in question
18
Constraint 1: Can the pension fund
invest in the pooling vehicle? (cont'd)
Country of
establishment of
pension fund
4.
UK
Restrictions as
to type of
investment that
may be held
Restrictions as to
percentage of
portfolio invested
in particular
investments
None specific –
prudent person
rule applies.
However,
necessary to
make sure that
general
restrictions
imposed by Article
18 of IORP
Directive
(2003/41/EC) as
implemented into
UK legislation
None specific, but
there are limitations
to (in) direct
investments in the
sponsoring company
(including person
connected or
associated with a
sponsoring
company)
Currency
restrictions
None
Other
No
Note 1: Watch out for Article 18(1)(c) of the IORP Directive (which applies to EU established pension funds):
“assets shall be predominantly invested on regulated markets”
Note 2: EU established pension funds will need to comply with Article 18 of the IORP Directive as implemented in
the EU country in question
19
Constraint 1: Can the pension fund
invest in the pooling vehicle? (cont'd)
5.
Country of
establishment
of pension
fund
Restrictions as
to type of
investment that
may be held
Restrictions as
to percentage of
portfolio
invested in
particular
investments
Currency
restrictions
US
ERISA
fiduciaries have
a duty to act
prudently (a
comparable
fiduciary
standard); no
specific statutory
or regulatory list
of approved
investments a
plan may hold
ERISA fiduciaries
have a duty to
diversify plan
investments; there
are no specific
statutory or
regulatory
restrictions as to
the percentage of
a portfolio that
can be invested in
particular assets
There are no
specific
currency
restrictions,
but ERISA
fiduciaries are
subject to
fiduciary
standards of
prudence,
diversification,
etc
Other
– A pooling vehicle and commingled subfunds may be subject to ERISA if 25% or
more of their respective assets are
attributable to U.S. pension plans
– Some multinational employers with U.S.
parent companies have unilaterally adopted
a structure whereby all assets invested via
the pooling vehicle are treated as subject to
ERISA (a “safe harbor” approach)
20
Constraint 1: Can the pension fund
invest in the pooling vehicle?
Due process to follow before investing:
Country of
establishment of
pension fund
Amend
statement of
investment
principles?
Obtain investment
advice
Other regulatory
requirements
1.
Belgium
Probably,
depends upon
content of
strategic
investment plan of
the fund
No
If SIP to be amended:
prior advice of works
council, health
committee or trade
union delegation of
sponsoring company
2.
Ireland
Yes
Yes
Not on fund's side
3.
The Netherlands
Probably,
depends upon
content of
strategic
investment plan of
the fund
No
No
4.
UK
Yes
Yes (Section 36 of
the Pensions Act
1995)
Comply with UK
Financial Services and
Markets Act 2000:
Needs to be a strategic
decision (not day to day)
or fall within "with
advice" exception
Comment
21
Constraint 1: Can the pension fund
invest in the pooling vehicle? (cont'd)
Due process to follow before investing:
Country of
establishment
of pension
fund
5.
USA
Amend
statement of
investment
principles?
Obtain
investment
advice
Allocation of Fiduciary Responsibility
Prudence,
diversification
and other
requirements
must be satisfied.
This requires
appropriate
process and
consideration
including, for
example,
adopting
appropriate
investment
guidelines
The sub-funds
should be
managed by an
“investment
manager” as
defined under
ERISA. Also,
the
“management
company” could
be an ERISA
fiduciary
Under ERISA, fiduciary responsibility can attach by
designation or by operation. U.S. pension plans
typically designate a “named fiduciary” to establish the
plan’s investment structure, asset allocation, selection
of managers, etc
– For a U.S. multinational, it is logical for: (i) the global
custodian function being exercised by the “master
trustee” to be expanded as described herein; and (ii)
the model for the pooling vehicle structured to comply
at all levels with ERISA. In addition, note that:
 if a U.S. plan designates a U.S. named fiduciary, but
actual investment control of its assets is exercised by
non-U.S. corporate executives, these non-U.S.
individuals also could have ERISA fiduciary
responsibility and potential liability
 if the U.S. plan designates non-U.S. corporate
individual or entity as its named fiduciary, the designee
will be subject to ERISA fiduciary standards with
respect to the decision to invest through the pooling
vehicle
22
Constraint 2: Restrictions on marketing
the pooling vehicle to the pension fund
Restrictions on marketing the pooling
vehicle to the pension fund
Comment
1.
Belgium
No
Pension funds = institutional investors
Shares of OPC must be and remain
registered.
2.
Ireland
No restriction for company sponsored CCF.
Third Party marketing QIFs would have to
be privately placed pursuant to local private
placement rules. UCITS would have to be
registered for sale in the relevant
jurisdictions
Irish funds have been privately placed
worldwide
3.
Luxembourg
UCITS requirement to comply with local
marketing rules/ restrictions applicable in the
countries of distribution. Luxembourg law
restrictions apply if marketed to Luxembourg
established pension funds
3.1 No additional Luxembourg law
restrictions apply to marketing the
UCITS to pension funds established in
countries outside of Luxembourg.
3.2 If the pension fund pooling vehicle
was to be marketed also to a pension
fund established in Luxembourg, there is
unlikely to be any additional restrictions,
as the contact would be a one to one
contact.
23
Constraint 2: Restrictions on marketing
the pooling vehicle to the pension fund (cont'd)
Restrictions on marketing the pooling
vehicle to the pension fund
Comment
4.
The Netherlands
No
For example, assets of the Italian
Pensplan are invested in closed
FGR of the APG Group
5.
UK
Financial Services Market Act 2000, Sections
21 and 238 includes restrictions on
invitations to invest in collective investment
schemes or otherwise engage in investment
activity. Necessary to fall within exemption
available for issue of promotional materials
to "high value trust"
The pooling vehicle will generally
be a collective investment scheme
for UK Financial Services and
Markets Act 2000 purposes
High value trusts are those with
assets in excess of £10 million
6.
USA
There are no statutory or regulatory
restrictions on marketing investments to
pension plans. The decision to invest the
pension plan’s assets in the pooled vehicle
would be a fiduciary decision under ERISA
Marketing typically is considered in
the context of managers seeking
investment by the U.S. plan in their
products
Note: The general rule is that country of location of pension fund sets the rules on marketing restrictions to that
pension fund.
24
Constraint 3: Constraints imposed by
the legal structure of the pooling vehicle
Country of
establishment
of pension
fund
Does the
vehicle have
a separate
legal
personality?
Is the vehicle
tax
transparent?
Restrictions
on operation
of pooling
vehicle
Nature of supervisory
regime
In specie
transfers in
and out
allowed?
1.
Belgium
FCP: no
UCIT: yes
FCP: Yes –
exempt from
corporate
income tax on
income and/or
capital gains.
UCIT: Yes
No quantitative
limits or riskspreading rules
apply. Permitted
investment
assets
restricted to
financial
instruments and
liquid assets
(should be
broadened in
near future).
See Deed of
Constitution.
No direct prudential
control by CBFA
(indirect control through
control on custodian,
management firm of
OPC and pension fund
– direct control on
scope of activities: no
public offers)
Registration with
Belgian Tax Ministry (no
control on content of
documents)
External auditor/ audit
firm
Yes, possible
subject to
contractual
provisions
2.
Ireland
No
Yes
Deed of
Constitution will
set these out
IFSRA (Irish statutory
regulator of financial
services industry)
Yes
25
Constraint 3: Constraints imposed by
the legal structure of the pooling vehicle (cont'd)
Country of
establishment
of pension
fund
3.
Luxembourg
Does the
vehicle have a
separate legal
personality?
No.
Is the vehicle
tax
transparent?
Restrictions on
operation of
pooling vehicle
Yes, from a
Luxembourg
perspective
and accepted
as such in the
main
jurisdictions
Deed of
constitution will
set these out
Nature of
supervisory
regime
CSSF
(Commission
de Surveillance
du Secteur
Financier)
In specie
transfers in and
out allowed?
Yes
26
Constraint 3: Constraints imposed by
the legal structure of the pooling vehicle (cont'd)
Country of
establishment
of pension
fund
4.
The
Netherlands
Does the
vehicle have a
separate legal
personality?
No, based on
contractual
arrangement
Is the vehicle
tax
transparent?
Yes
Restrictions on
operation of
pooling vehicle
Deed of
Constitution will
set these out
Nature of
supervisory
regime
In specie
transfers in and
out allowed?
Possible
supervision by
AFM (Authority
Financial
Markets) and
DNB (Dutch
Central Bank) if
it involves
outsourcing by
Dutch pension
funds
No supervision
if participation
is only offered
to qualified
investors within
the meaning of
the Prospectus
Directive
Yes, possibly
made subject to
approval of other
participants
27
Constraint 3: Constraints imposed by the legal structure
of the pooling vehicle (cont'd)
5.
Country of
establishment
of pension
fund
Does the vehicle
have a separate
legal personality?
Is the vehicle
tax
transparent?
Restrictions on
operation of
pooling vehicle
Nature of
supervisory
regime
In specie
transfers in and
out allowed?
USA
There is no
separate vehicle
under US law
designed for crossborder pooling of
pension assets.
Yes; the pooling
vehicle should
be transparent
(e.g. a
partnership for
U.S. tax
purposes)
Pension plans
participating in
the master trust
must be limited
to US plans to
benefit from tax
exemption
available for
master trust
(see Note 1)
N/A; if
considered to
hold plan assets,
pooling vehicle
will be subject to
ERISA.
ERISA (the
Internal
Revenue Code
for tax
considerations)
Yes, but subject
to prohibited
transaction* rules
under ERISA and
the Internal
Revenue Code
A US master trust
may only hold
assets of certain
US retirement
arrangements (i.e.
code section
401(a) tax qualified
plans, IRAs and
governmental plans
to benefit from US
tax exemptions
*Securities and other laws also can be applicable
Note 1: A US master trust may only hold assets of certain US retirement arrangements (i.e. code section 401(a) tax
qualified plans, IRAs and governmental plans) to benefit from US tax exemptions
28
Constraint 4: Constraints imposed by the regulatory regime
of the country of establishment of the pooling vehicle
Country of
establishment
of pension
fund
Minimum
capital
requirement
Authorisation
for starting
business?
Need for
prospectus/
listing
particulars?
Limits on
controls
available to
sponsoring
employer
Limits on
controls
available to
investors
Governance
structure
1.
Belgium
None
None – Upon
confirmation
of its
registration
with Belgian
Tax Ministry
No –
Information
brochure is
enough
Through
pension fund
and SIP
See
contract/
Deed of
constitution
Deed of
constitution –
Board of
Directors or
Manager Custodian
2.
Ireland
QIF:
€250,000 –
minimum
investment;
€25m per
investor.
UCITS: no
minimum
investment
IFSRA
approval*
Yes,
prospectus
Usually
imposed
under Deed
of
Constitution
Usually
imposed
under Deed
of
Constitution
Deed of
Constitution –
Board of
Directors of
Management
Company
*Changes to structure require prior approval, e.g. Investment Managers
29
Constraint 4: Constraints imposed by the regulatory regime
of the country of establishment of the pooling vehicle (cont'd)
Country of
establishment
of pension
fund
Minimum
capital
requirement
Authorisation
for starting
business?
Need for
prospectus/
listing
particulars?
Limits on
controls
available to
sponsoring
employer
Limits on
controls
available to
investors
Governance
structure
3.
Luxembourg
Minimum net
assets
€ 1,250,000
(to be reached
within 6
months of
authorisation)
CSSF must
authorise the
Management
Company of
the FCP.
CSSF must
approve the
Deed of
Constitution
Yes.
Prospectus
required
Usually
imposed
under Deed
of
Constitution.
But direct
control not
usually
possible
Deed of
Constitution
Board of directors
of Management
Company
4.
The
Netherlands
None
None
No
Custodian is
in control
If separate
custodians,
segregated
liability
General assembly
and ManagerCustodian
5.
USA
No global
pooling
vehicles
developed
under U.S.
law.
N/A
N/A
N/A
N/A
N/A
N/A
30
Constraint 5: Tax hurdles:
Country of establishment of pooling vehicle
Income Tax
Capital
Gains
Tax
VAT on
management
fees
Stamp
Duty
Other
Taxes
Fiscal
transparency
of the
investment
vehicle
Double tax
treaties:
Country of
establishment of
investment
vehicle
1.
Belgium
FCP : Nil
UCIT : Yes –
Subject to
corporate income
tax but on
alternative tax
basis (normally,
tax=0); Full credit
for Belgian
dividend and
interest
withholding tax on
dividend and
interest received
Nil
Nil on
management
fees
Nil
Reduced
annual
tax on
collective
investmen
t funds of
1.01% per
year
Yes
UCIT: eligible
for treaty
benefits and
reduced
withholding tax
rates under
Belgium's tax
treaty network
e.g.: US
2.
Ireland
Nil
Nil
Nil on
management
company
fees. Yes on
Investment
Managers
fees
Nil
Nil
Yes
N/A vehicle tax
transparent.
Each investor
should have to
look to tax
treaties of its
own home
jurisdiction
31
Constraint 5: Tax hurdles:
Country of establishment of pooling vehicle (cont'd)
Income
Tax
3.
Luxembourg
Nil
Capital
Gains
Tax
Nil
VAT on
management
fees
Exempt (as
management
services in
relation to
collective
investment
scheme)
Stamp
Duty
Nil
Other Taxes
Fiscal
transparency
of the
investment
vehicle
Double tax
treaties:
Country of
establishment
of investment
vehicle
Capital duty,
previously
€1,250, was
abolished with
effect from 1st
January, 2009
Taxe
d'abonment:
(a) Exemption
if only pension
funds of
companies in
the same
corporate
group invest
(but see Note
1)
Yes, in
Luxembourg.
But need to
check position
of local tax
authorities of:
- investors,
and
- investment
FCP does not
benefit from
Luxembourg
double tax
treaties if it is
accepted as
tax transparent
Instead,
investors/
investments
need to look at
double tax
treaties
between
country of
investor and
country of
investment
Note 1: If the pooling vehicle is established as a SIF, exemption will also apply if investors are all pension funds
(whether or not in the same group).
32
Constraint 5: Tax hurdles:
Country of establishment of pooling vehicle (cont'd)
Income Tax
Capital
Gains
Tax
VAT on
management
fees
Stamp
Duty
Luxembourg
(cont'd)
4.
The
Netherlands
Other
Taxes
Fiscal
transparency
of the
investment
vehicle
Double tax
treaties: Country
of establishment
of investment
vehicle
Yes
Treaties with
Austria, Belgium,
Denmark,
Norway, South
Africa, UK and
Taiwan.
Memorandum of
understanding
with US
(b) 0.01%
p.a., if only
pension
funds (not
falling in
(a) above)
invest,
payable
quarterly
on net
asset
value FCP
Nil
Nil
Exempt from
VAT if
management
services
collective
investment
funds
Nil
Nil
33
Constraint 5: Tax hurdles:
Country of establishment of pooling vehicle (cont'd)
Income Tax
5.
USA
N/A; but note
that US income
tax could apply
at the US trust
level if a subfund engages
in transactions
involving
leverage or
active operation
of a business
(rather than
passive
investment)
Capital
Gains
Tax
N/A
VAT on
management
fees
N/A
Stamp
Duty
N/A
Other
Taxes
N/A
Fiscal
transparency
of the
investment
vehicle
Double tax
treaties: Country
of establishment
of investment
vehicle
Should
qualify under
US tax rules
(e.g., as a
partnership)
Check tax
treaties between
country of plan
and country of
investment with
respect to taxes
at the subfund
level, e.g.,
(withholding of
dividends at the
source)
34
Constraint 5: Tax hurdles (cont'd)
The existing position
Taxes in country of investor?
Pension
Fund 2
Pension
Fund 1
Taxes in country of investment?
Equities
Belgium
Ireland
The
Netherlands
Equities
UK
US
Belgium
Ireland
The
Netherlands
UK
US
35
Constraint 5: Tax hurdles (cont'd)
The position on investment pooling
Taxes in country of investor?
Pension
Fund 1
Pension
Fund 2
Units
Units
Taxes in country of pooling vehicle?
Pooling vehicle
Taxes in country of investment?
Equities
Belgium
Ireland
The
Netherlands
UK
US
36
Constraint 6: Legal risk
Country of
establishment
of pension fund
Assets more remote
(custody, monitoring
and reporting)
Extra country risk
(nationalisation/
expropriation, exchange
control)
Complexity
1.
Belgium
In theory, yes. But, in
practice, no.
In theory, yes. But, in practice,
no (at least in normal
circumstances)
Not particularly complex
2.
Ireland
In theory, yes. But, in
practice, no.
In theory, yes. But, in practice,
no (at least in normal
circumstances)
Not particularly complex
3.
The Netherlands
In theory, yes. But, in
practice, no.
In theory, yes. But, in practice,
no (at least in normal
circumstances)
Not particularly complex
4.
UK
In theory, yes. But, in
practice, no.
In theory, yes. But, in practice,
no (at least in normal
circumstances)
Not particularly complex
5.
USA
If plan assets and ERISA
applies, indication of
ownership and other
requirements must be
met.
Fiduciary making decision is
subject to prudence and other
ERISA standards.
ERISA is complex; with
Internal Revenue Code and
other legal overlaps.
37
Constraint 6: Legal risk (cont'd)
The existing position
Belgium
Ireland
Pension
Fund 1
Pension
Fund 2
Equities
Equities
The
Netherlands
UK
US
Belgium
Ireland
The
Netherlands
UK
US
38
Constraint 6: Legal risk (cont'd)
The position on investment pooling
Legal risk: Country of investor
EU Pension
Fund 1
EU Pension
Fund 2
Units
Units
Legal risk: country of establishment of
pooling vehicle
Pooling vehicle
Legal risk: country of location of
investment
Equities
Belgium
Ireland
The
Netherlands
UK
US
39
Conclusions
– Cross-border pension fund asset pooling has happened
(e.g. Unilever Group Pension Funds)
– Easier to achieve than cross-border pension fund asset
and liability pooling (at least for legacy pension funds)
– So long as pooled assets are sufficiently large, efficiencies
are available
– Possible to achieve improvements in governance for the
participating group pension funds through better
concentration of available expertise within the sponsoring
employer group
– Additional compliance and administration to the extent
plans subject to other legal systems (e.g. U.S. and ERISA)
are to be included in the global pooling structure
40