Pan european-pension-funds-09

Pan-European Pension Funds in a Future World

3Pan-European pension funds in a future world

What is the best location for pan-European pension funds?

The importance of pan-European pension funds may easily be overshadowed by the current turbulence on the global financialmarkets. The sharp decline in the financial markets has had a devastating impact on the coverage ratios of many pension funds.Together with falling interest rates, it has reduced the average coverage ratio of many pension funds to a level well below 100%.The existence of under coverage has serious implications for pension schemes. Lower indexation rates, increased contributionsfrom employees and sponsors, and even decreased benefits are potential solutions. Another consequence is that the portability ofpensions is restricted when there is insufficient coverage. Furthermore, companies have become aware of the risks involved inproviding a defined benefit (DB) pension scheme if they can be held responsible for all or part of a financial deficit of the pensionfund.

There are enough short-term problems for pension funds to keep management’s attention, but in the longer run other issues, likethe ageing of the European population, cannot be ignored. Over the next 20 years, the ratio between active (contributing) pensionfund members and beneficiaries will change drastically. As countries with large pay-as-you-go systems will be the first to sufferfrom this, they are looking into the establishment of funded systems. This will possibly enlarge the pension fund market on anunprecedented scale. The funded pension schemes will change over time from net asset accumulators (when the contributionsoutweigh the benefits paid) to institutions paying out more benefits than they have contributions coming in.

More and more multinational companies are looking at the possibilities of setting-up a pan-European pension fund. What would bethe best location for such a fund? Ireland, Luxembourg, Belgium, the U.K. and the Netherlands seem to be the main contenders.How do they compare in terms of solvency requirements, governance, taxation and flexibility?

These and other factors will determine the ideal location for a pan-European pension fund in this report. These topics are reviewed,reflecting the key characteristics of the legislation in contender jurisdictions to serve as an inventory of the current status of theimplementation of the IORP Directive in those Member States.

We trust this report will be a useful source of information for the decision makers in the pension community.

March 2009

Prof.dr. A.H.M. Daniels, Ernst & Young Partner Financial Services, Amsterdam

Foreword

4 Pan-European pension funds in a future world


• For a country to become the home state of a pan-Europeanpension fund, a good infrastructure of financial serviceproviders is a definite advantage. Moreover, the legislationin that country must allow for various financial products torun a scheme for different people in different countriesunder different labor laws.

• The introduction of the IORP Directive has promptedcountries to change their national pension legislation tovarying degrees. Some have hardly implemented anychanges at all, while other countries – notably Luxembourgand Belgium - have created new legal entities specificallydesigned to cater for pan-European pension funds.

• Looking at the country level, there are still many issues tobe resolved before Europe becomes a level playing field forpension funds. The differences often result from a nationalsocial and labor history that has created a diverse range ofretirement systems in Europe, with all sorts of pensionfunds active in each system.

• The IORP Directive targets private, funded occupationalpension funds, the largest markets for these being theUnited Kingdom and the Netherlands. Other Europeanmarkets are emerging as countries switch from unfundedto funded systems.

• The IORP Directive encourages the creation of pan-European pension funds, with international assets andliabilities brought together in a single legal entity. Thisoffers opportunities for multinational companies toincrease efficiency, reduce operational risk and improvegovernance.

• CEIOPS has identified some 70 instances of pension fundshaving established international activities. The researchdoes not provide details on the identity of these cross-border pension funds, making it difficult to evaluate thenature of the reported cross-border activities. Mostinstances are examples of asset pooling rather than thecreation of a pan-European pension fund.

• Looking at the key aspects of the pension fund-relatedlegislation per country, it turns out that each country hastranslated the Directive differently, with each countryhaving different legal entities and different rules governingwhat types of scheme can be implemented. Only theregistration procedure of an IORP is similar in the fivecountries investigated.

• On solvency, arbitrage may arise specifically because ofthe level of the required technical provision, with Belgiumand the United Kingdom having far lower requirementsthan the Netherlands.

• Regarding investment management principles, some stateshave additional requirements that exceed the requirementsof the Directive. Some of these requirements might bevaluable in today’s climate of more demand fortransparency, governance and risk management.

• In terms of information requirements, pension funds in allcountries need to proactively inform the variousstakeholders through annual reports, benefit statementsand statements of investment policy. Properly informingthe pension fund members and beneficiaries is governedby the prudential or the social and labor law in the hostcountries, making arbitrage between home countries onthis subject very unlikely.

• Legislation on ring-fencing varies widely, due to the lack ofa proper definition of the term. The Netherlands seems tohave the most restrictive legislation applying to thissubject.

• The current tax regimes for pan-European pension fundsare nearly equivalent, with the exception of the applicationof the VAT regimes. In other words, there is the paradoxthat different interpretations of the EU harmonized VATlegislation lead to the greatest distortion in the taxtreatment of a pan-European pension fund. Luxembourgand Belgium, followed by Ireland, seem to have the mostfavorable VAT-regime for pan-European pension funds.

• Luxembourg, the Netherlands and Ireland are mentionedwhen it comes to asset pooling. Luxembourg has excellentfacilities and plenty of experienced service providers.Ireland might appeal to U.S. stakeholders as it shares theAnglo-Saxon culture. For pension pooling or setting up apan-European pension fund, Luxembourg and theNetherlands are mentioned. Belgium would be thepreferred choice, if regulatory arbitrage in relation tosolvency were the only decision criterion. However, culturalsimilarities, the perceived quality of the system, thepresence of experienced service providers and even thepracticality of physical proximity are other criteriamentioned.

• Taking note of this complexity, we have seen two businessmodels emerging for the establishment of a pan-Europeanpension fund or IORP, the ‘single corporate model’ and ‘themultiple clients model’. The assumptions underlying eachmodel are different, leading to differences in perspective.Both models can be implemented in a step-by-stepapproach and both could eventually lead to a fullyoperational pan-European IORP.

Executive summary


Introduction

1. The European market for cross-border pensions1.1 European pension overview1.2 IORP Directive and the market for

occupational pension schemes 1.3 Stakeholder views

2. Prime location for pan-European pension funds2.1 The legal framework2.2 Solvency rules2.3 Investment management principles2.4 Required information2.5 Ring-fencing2.6 Framework outsourcing2.7 Taxation

3. Emerging business models3.1 Single corporate model3.2 Multiple clients model

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Table of Content


The EU Directive (2003/41/EC) on the activities ofinstitutions for occupational retirement provision (IORPs),commonly known as the IORP Directive or Pension FundsDirective, was published in the EU’s Official Journal onSeptember 23, 2003, including the requirement of beingincorporated into the legislation of each European UnionMember State by September 2005. All members werecompliant as of June 2007, even though there are still someissues to resolve. The IORP Directive encourages the creationof pan-European company pension plans1. This initiativeallows an employer to create a pension plan in one locationand cover all European employees under this single plan. TheDirective targets the integrated pension scheme value chain(pension administration, pension communication, assetmanagement and risk management), whereas the providersof these activities have thus far concentrated on nationalmarkets.

In the current context of volatile financial markets, complexaccounting rules and toughening regulations, companies aremore aware of the financial risks associated with theirpension plans and they are looking for new ways ofcontrolling costs and reducing risks. This Directive could beseen as the “holy grail” for moving towards a moreintegrated European pension strategy, enabling costefficiencies, increased competitiveness and shared risks, aswell as possibly easing the cross-border mobility ofemployees. But until today, the effects of the Pension FundsDirective have been moderate, and concrete actions havebeen limited to the bundling and outsourcing of certain partsof pension activities.

Does that mean that the Directive is more mirage than reality?Some experts do not think pan-European schemes will everhappen; some say it is an absolute fantasy! Is that true?

Even if the arrival of real pan-European pension platformsfrom which all aspects of pension funds in different countries

could be managed remains a distant vision, mainly due tolabor and social laws, different regulatory reportingrequirements and language barriers, cross-border activitiesare becoming more popular and approaching a pan-Europeanpension model step-by-step. On the one hand, enterprises,particularly multinationals, are now exploring options forcentralizing pension activities in order to be able to offerinternationally coherent benefit packages, realize economies-of-scale and improve their risk management, while on theother, pension administrators and insurance companies arelooking to extend their package offerings.

In the first chapter, we give an overview of the Europeanmarket for cross-border pension funds. The information inthis section is based on desk research as well as interviewswith stakeholders. Then, in the second section, we comparethe pension fund related legislation that was implemented inBelgium, Luxembourg, the Netherlands, Ireland and the U.K.in order to provide a picture of how these countries aretrying to facilitate the establishment of pan-Europeanpension funds. At the same time, the best practices andcompetitiveness of these regimes in attracting pan-Europeanpension fund activities are considered. A comparison is madeusing the key aspects of the organization of a pan-Europeanpension fund: legal framework, solvency rules, investmentmanagement principles, required information, ring-fencing,outsourcing and taxation. And finally, in the third section, wepresent two emerging business models for the establishmentof a pan-European pension fund or IORP. Both models can beimplemented using a step-by-step approach and both couldeventually lead to a fully operational pan-European IORP.

Note: The life insurers and the introduction of the Europeanpassport, that in effect allows life insurers to run pan-European businesses, are not the subject of this research.They will occasionally be mentioned, however, because theirsolutions are so close to the pan-European pension fundsolutions, that they cannot be ignored.

Introduction

1 It should be noted that the Directive only applies to funded occupational pension schemes; it does not apply to state schemes or individual arrangements.


1.1European pension overview

• Pension funds can be found in every European country.The largest funds in Europe, measured by the total valueof their assets in 2008, are predominantly English, Dutchand Scandinavian. The Scandinavian funds are mostlypublic entities, however, and therefore not consideredunder the IORP Directive. The pensions market is verydiverse with many different forms of retirement provision.In general, the UK and the Netherlands have the largestmarkets, measured in terms of total pension assets. In thefuture, as more countries reform their pension systems inthe light of the ageing population, new pension growth-markets will emerge throughout Europe.

Table 1. Top 30 pension funds in Europe

Source: IPE Magazine, supplement Europe Top 1000 Pension Funds,September, 2008

bln €1 Government Pension Fund - Global Norway 2422 ABP Neth 2053 PFZW Neth 884 Arbejdsmarkedets Tillaegspension Denm 565 Reserva de la Seguridad Social Spain 566 British Telecommunications UK 547 Alecta Swed 438 Bayerische Versorgungskammer Ger 419 Universities Superannuation Scheme UK 36

10 Coal Pension Trustees UK 3411 Electricity Pensions Services UK 3312 Metaal en Techniek Neth 3313 Danica Pension Denm 3314 Fonds de Reserve pour les retraites Fra 3115 Varma Mutual Fin 30

2 OECD, Private Pensions, OECD Classification and Glossary, 2005.

bln €16 Royal Mail Pensions UK 3017 AMF Pension Swed 2918 PFA Pension Denm 2919 Royal Bank of Scotland UK 2620 Railways Pensions Trustee Comp UK 2521 Ilmarinen Mutual Fin 2522 Government Pension Fund Norway Norway 2523 Bouwnijverheid Neth 2524 AP Fonden 2 Swed 2425 Local Government Pension Inst Fin 2426 AP Fonden 4 Swed 2427 AP Fonden 3 Swed 2428 AP Fonden 1 Swed 2329 KLP Norway 2330 Metalektro Neth 22

The European market for pensions does not have thecharacteristics of a single market, but is a patchwork ofnational retirement systems. Every system has its ownelements, resulting from the country’s social history and, inparticular, its labor relations. The building blocks for anyretirement system are the different pension schemes, run bypension funds or insurers. Together, these schemesdetermine the income a person will receive after reachingretirement age – usually 65. This post-retirement income, orpension benefits, can be defined as payments made to apension fund member (or dependants) after retirement2.

Pension fund activitiesThe pension funds or insurers running a pension schemeneed to perform certain activities in order to pay the rightbenefits to the right person at the right time. The four mainactivities are:

1. Pension Administration: A pension fund has to keep trackof all its members and all other relevant data needed forthe calculation of premiums due and pension rights. Animportant part of this activity is collecting the premiumsfrom the active members and paying out the benefits tothe beneficiaries.

2. Asset Management: The premiums collected have to beinvested in order to make sure that when a pension fundmember is eligible for retirement, the funds to pay his orher benefits actually exist.

3. Risk Management: This process is performed for largepopulations of pension fund members, so that longevityand/or mortality risks of can be evened out.

4. Pension Communication: A pension fund needs toregularly inform its members of the rights they have builtup and what benefits they can expect in the future. Inaddition, a pension fund needs to inform the supervisor ofits current financial state. The supervisor then determineswhether the fund is properly funded and could decide toprescribe corrective measures.

Access to the schemeThere is a wide variety of pension schemes in Europe. Themost commonly used factor to classify them is access to thescheme.

Firstly, pension schemes can be subdivided into public andprivate pension schemes. The public schemes are run by thecentral government or other public sector bodies. They aretraditionally financed on a pay-as-you-go basis (unfunded andbenefits usually paid from general taxes), but with the ageingof populations, countries are starting to fund these schemes.

1 The European market for cross-border pensions


The private pension schemes are run by institutions otherthan the government and are generally funded.

The second subdivision can be made between occupationalpension schemes and personal pension schemes. Access tooccupational plans is linked to an employment or professionalrelationship between the plan members and the entity thatestablishes the plan (the plan sponsor). Occupational plansmay be established by individual employers or groups ofemployers (e.g. industry associations) and labor orprofessional associations, jointly or separately. Access topersonal plans does not have to be linked to an employmentrelationship. The plans are established and administereddirectly by a pension fund or financial institution acting aspension provider, without any intervention by employers.

The third subdivision is between mandatory and voluntarypension schemes. Mandatory pension schemes can be usedby a government to attain a targeted post-retirement incomefor all people. Employers are obliged by law to participate inmandatory occupational pension plans. They must set up(and make contributions to) occupational pension planswhich employees will normally be required to join. Throughvoluntary schemes, individuals can always try to achieve ahigher post retirement income than targeted.

Replacement RatesThe different pension schemes form an integrated systemfollowing the three-pillar model used by the OECD and otherinstitutions. • The first pillar consists of public pension schemes.• The second pillar consists of private occupational pension

schemes that have a mandatory character.• The third pillar consists of private personal pension

schemes.

The resulting benefits can be measured and compared forthe different countries. The usual way to do this is bycomparing the average pension income that an individual willreceive in relation to his average pre-retirement income. Thisis called the replacement rate.

Figure 1. Net replacement rates for individuals, average incomeand mandatory programs

Source: OECD Pension Statistics, OECD Internet Site, February 2009

The figure shows the net replacement rate for some of themain European countries and the United States. The netreplacement rate compares net incomes before and afterretirement and includes pension benefits and tax measures.The percentages shown are for mandatory pension programsonly, i.e. excluding voluntary programs. Mandatory pensionschemes are most generous in Luxembourg, Austria,Hungary and the Netherlands, with net replacement rates ofover 80%. At the other end of the spectrum, the Irish and theEnglish system only have a net replacement rate of around40%. Individuals may choose to build up additional pensionbenefits in voluntary pension schemes. This will be morelikely to occur in countries with lower mandatoryreplacement rates.

Defined benefit versus defined contribution There are many ways to determine the amount of benefitpaid to a pension fund member after retirement. Thedistinction that has the most influence on how a pension fundshould be managed is that between defined benefit anddefined contribution schemes. This factor determines therisks involved for pension fund members and the pensionfund itself or the pension fund sponsor.

Defined contribution (DC) occupational pension plans areoccupational pension plans under which the plan sponsorpays fixed contributions and has no legal obligation to payfurther contributions to an ongoing plan in the event ofunfavorable plan experience3.

Defined benefit (DB) occupational pension plans areoccupational plans other than defined contributions plans. Intraditional DB plans, the benefits are related by a formula to

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the members’ wages or salaries, length of employment, orother factors. In hybrid DB plans, the benefits depend on arate of return credited to contributions. This rate of return iseither specified in the plan rules, independent of the actualreturn on any supporting assets (e.g. fixed, indexed to amarket benchmark, tied to salary or profit growth, etc.), or iscalculated with reference to the actual return on thesupporting assets and a minimum return guarantee specifiedin the plan rules.

In Europe, both forms are common, with public schemesusually being DB and private schemes tending to be DC.

In the Netherlands, the private schemes are nearly all DB. Inthe light of the current financial crisis and the risks involvedfor the plan sponsor in a DB scheme, there is a movementtowards more DC arrangements.


1.2 IORP Directive and the market for occupational pension schemes

• The Committee of European Insurance and OccupationalPensions Supervisors (CEIOPS) has identified some 70pension funds that have established internationalactivities. Most of these activities are actuallyinternational asset management. Looking at thecountries, we see that they are all adapting theirlegislation to make pan-European pension funds possible.However, the barriers still outweigh the advantages, sothat the full-scale introduction of IORP has not taken off.

The IORP Directive applies to occupational retirementpension schemes only, excluding institutions managing socialsecurity schemes, institutions operating on a pay-as-you-gobasis and institutions that are already covered by otherdirectives, such as life insurance companies4. These privateoccupational retirement pension schemes are operated bypension funds. The funds hold assets to cover the provisionfor benefit payments to people after retirement.

Figure 2. Pension funds investments (x million USD)


In the graph above, the combined assets in 2007 for all theprivate pension funds per country are added, providinginsight into the importance of the pension fund sector foreach country. The large public pension schemes, like theones in Scandinavia, are excluded from this overview.

The largest market for pension funds in Europe is the UnitedKingdom. With assets worth 2 trillion US dollars (the USsector has USD 10 trillion in assets), it is double the size ofthe Dutch market. Switzerland is the third largest Europeanpension fund market, in turn being half the size of theNetherlands. The other European markets are a lot smaller.

There are a few countries in Europe, where public pensionfunds, not being financed on a pay-as-you-go basis, holdsignificant assets: Norway, Sweden, Ireland and Finland.

CEIOPS and cross-border activitiesWith the largest pension fund markets in the UK and theNetherlands and the largest funds being Dutch,Scandinavian, Spanish or English, the European pension fundmarket is dominated by nationally operating pension funds.These funds are registered and operate in the same countryas the country of the employment relationship that led toestablishment of the pension fund. The first country is calledthe “home country”, and the second is called the “hostcountry”. CEIOPS monitors cross-border activities, wherepension funds employ activities in a different country thanthe country where the pension fund members work, live andpay their premiums. At year-end 2008, CEIOPS reported 70 instances of cross-border activities5.

Figure 3. Reported cross-border pensions activities


The cross-border pension funds employ activities in at leastone host country other than the home country. It turns outthat the United Kingdom is home to 32 pension schemes withcross-border activities, with Ireland second with 22. Theresearch also reveals that most of the reported cross-borderpension funds (56) have activities in only one different hoststate and 11 funds have activities in two or three differenthost countries. There are two UK pension funds withactivities in four different host states and there is onepension fund in Luxembourg with reported activities in 10different European host states. The CEIOPS research doesnot give the identity of the various cross-border pensionfunds, making it difficult to evaluate the nature of thereported cross-border activities (is it ‘just’ asset pooling or isit a ‘real’ pan-European pension fund as modeled above).

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4 Directive 2003/41/EC of 3 June 2003, Article 2.5 CEIOPS-OP-19/08 November 11, 2008, 2008 report on market developments.


The IORP Directive allows an employer to create a pensionfund platform located in one country (home country) andoperate several pension plans for employees working indifferent countries (host countries). The pension schemes inthe host countries A, B, C and D contribute to the pensionfund that has its activities located in home country B. Theemployment relationships, that form the basis for theoccupational pension schemes, exist in the host countries.Social and labor legislation in the host countries defines theshape of the pension scheme: who has access to the scheme,is it a DB or DC scheme, who contributes how much to thescheme, when will the scheme pay benefits, will there becompensation for inflation, and other characteristics. Thehost country also determines the tax regime applying tocontributions and pension provisions. The activities of the

Sponsor = Multinational companywith employees in European countries A, B, C, D

Host Country BSection

Host Country CSection

Host Country DSection

Host Country ASection

Financial Services Aspects

Taxation Aspects

Social and Labor laws

Specificinvestment and/orinformationrequirements

Country ATax laws

Country BTax laws

Country CTax laws

Country DTax laws

Country A• Social and labor laws• Specific investmentand/or informationrequirements

Country B• Social and labor laws• Specific investmentand/or informationrequirements

Country C• Social and labor laws• Specific investmentand/or informationrequirements

Country D• Social and labor laws• Specific investmentand/or informationrequirements

complies with complies with complies with complies with

Benefits paid as ifCountry A

Benefits paid as ifCountry B

Benefits paid as ifCountry C

Benefits paid as ifCountry D

• The pan-European pension fundoperating cross-border will only besupervised by the Home Member Statesupervisory authority

• Assets and liabilities co-mingle

IORPlocated in

Home country B=

SINGLE FUND

pension fund are located in the home country. Theseactivities are under the supervision of the home country.Home country pension legislation determines how theseactivities may be executed and how the pension fund has toreport these activities to the home country supervisor.

Some countries have already grasped the opportunityprovided by the implementation of the IORP Directive andhave designed dedicated pension vehicles to facilitate thecreation of pan-European funds, while others made only afew changes to their systems, as they rely on theirreputations as favorite locations for pension funds. Below wegive an overview of the pension vehicles. These vehicles willbe further analyzed in the section “Legal Framework”.

Figure 4. The IORP model for a pan-European pension plan

Sources: EFRP, The EFRP model for European pensions, October 2003, and CBK analysis


Sponsor = Multinational companywith employees in European countries A, B, C, D

Host Country BSection

Host Country CSection

Host Country DSection

Host Country ASection

Financial Services Aspects

Taxation Aspects

Social and Labor laws

Specificinvestment and/orinformationrequirements

Country ATax laws

Country BTax laws

Country CTax laws

Country DTax laws

Country A• Social and labor laws• Specific investmentand/or informationrequirements

Country B• Social and labor laws• Specific investmentand/or informationrequirements

Country C• Social and labor laws• Specific investmentand/or informationrequirements

Country D• Social and labor laws• Specific investmentand/or informationrequirements

complies with complies with complies with complies with

Benefits paid as ifCountry A

Benefits paid as ifCountry B

Benefits paid as ifCountry C

Benefits paid as ifCountry D

• The pan-European pension fundoperating cross-border will only besupervised by the Home Member Statesupervisory authority

• Assets and liabilities co-mingle

IORPlocated in

Home country B=

SINGLE FUND

Sources: EFRP, The EFRP model for European pensions, October 2003, and CBK analysis

Figure 5. Pension vehicles

Dedicated pension vehicles

Belgium• Organization for Financing Pensions (OFP)

Luxembourg

• Pension Savings Association (ASSEP)• Pension Funds regulated by the insurance supervisory authority (CAA)

Netherlands• The current legal situation (pension fund) taking into account limitations on domain and ring-fencing

Several legislative proposals• Premium Pension Institution (PPI)• Multi Pension Fund (multi-opf)• All Pension Institute (API)

Can be used as pension vehiclesUnited Kingdom

• Trust based occupational pension plan• A contract based group personal arrangement

Ireland• A trust arrangement with trustees

• Pensions Savings Company with Variable Capital (SEPCAV)

Snapshot of the perceived benefits of a pan-Europeanpension fund

Efficiency and economies of scale

1. Benefits for the employer• The implementation of a pan-European pension plan

reduces the costs of duplication by centralizing andstandardizing (as much as possible) the variouspension plan activities (asset management,administration, risk management and communication).

• A pan-European pension plan could help multinationalsto implement a European benefits strategy as amanagement instrument, offering benefits to all theiremployees .

• It takes less time to oversee one plan than to managemultiple schemes. For example, a multinational canimplement one corporate intranet site to gatherinformation for reporting as well as communicationpurposes.

2. Benefits for the employees• For employees, increased efficiency could result in

either improved benefits or lower contributions.• For small workforces located in different European

countries, a pan-European pension plan could improvethe investment prospects, as employees can enjoy thebenefits associated with being part of a largeroperation. In addition, they can benefit from the moreprofessional service level of a single pan-Europeanretirement fund.

• Mobile employees can avoid complex series oftransfers from one pension arrangement to anotherand will have a “one-stop-shop” for their pensionarrangements, while centralizing their benefits within asingle European fund also means dealing with onepayout institution.

Operational risk and governance

• Multinationals would have a better coordination andcontrol on their pensions’ benefit design, funding,investment, administration, communication thanks to a


Advantages of a cross-border pension fundUnder the Directive, cross-border assets and liabilities of apension fund can be combined within a single legal entity.This offers opportunities for multinational companies to gainefficiency and economies of scale, with cost savings as adirect result; reduce operational risk and improvegovernance, with fewer providers and interfaces to manage;and facilitate mobility of employees across the EU and avoidthe need to set up several plans.

Barriers against establishing a cross-border pension fundWe have seen the benefits of establishing a pan-Europeanpension plan. There are opportunities to save costs, increasemanagement efficiency, improve governance procedures andfacilitate employees’ mobility. In addition, specific dedicatedpension vehicles have been introduced to facilitate thecreation of pan-European pension fund. However, there iscurrently no pan-European pension fund as the barriers stilloutweigh the benefits.

Firstly, the reluctance is inherent to Member Stateinterpretation of specific articles. CEIOPS has collectedcomments from Member State supervisors on areas thathave been problematic due to differences in interpretationand implementation of the IORP Directive across the EUMember States, including reporting requirements (both tosupervisory authorities and to members and beneficiaries)and custodianship6. The report confirms that Member Stateshave “definitional differences” and that clarification isrequired in four areas: cross-border activity, subordinatedloans, ring-fencing and investment regulations.

Secondly, some of the biggest hurdles faced bymultinationals have been discriminatory tax treatments inthe EU Member States, although these barriers have begunto break down. Others include complying with the social andlabor laws of each country. As long as these laws are notharmonized within the EU, occupational pension products willbe subject to different requirements in the various EUcountries, which makes it very complex to administer cross-border contracts. In addition, the costs and amount ofresearch needed to make such a move are quitediscouraging. And finally, there is reluctance from MemberStates to see pension capital drift away from domesticmarkets.

better harmonization and standardization approach ofits pension plans.

• Multinationals can focus their attention on one singleplan, reducing the risks which may result from poorgovernance.

• The IORP Directive means that Member States accepta system of mutual recognition of each other’ sprudential supervision. As a result, pan-Europeanpension funds report to one supervisor and complywith one set of prudential rules (even if they still needto comply with the social and labor laws and specificinvestment and/or information requirements of thehost states – see the IORP model for a pan-Europeanpension previously mentioned).

6 CEIOPS, Initial Review of Key Aspects of the Implementation of the IORP Directive 31 March, 2008.


of in-between options, where the pension fund establishes apan-European approach only for certain activities. Aprogressive, step-by-step implementation of these alternativescan be easier to manage and provide accelerated savings, aswell as helping companies approach the creation of a pan-European fund. In principle, each of the identified pension fundactivities can be managed on a pan-European basis:

1.Combining the administrations of pension funds or evenpension schemes from different countries can lead totraditional scale advantages. Pension deliveryorganizations, like Mn Services or Syntrus Achmea in theNetherlands, are involved in this mainly on a national scale,but could expand to a European scale.

2.Combining the asset management of several funds is calledasset pooling. Through the collective management ofassets, the benefits to the users of the service can bemaximized. The European solution is to bring pensionassets in Europe under a single roof, in order to achieveimproved governance, increased operating efficiency,reduced asset management costs and access to best-of-breed asset management solutions.

3.Sharing the risks of several pension fund populations iscalled risk pooling. This is an international profit sharingsystem, which combines the premiums paid to insure riskbenefits worldwide into a single account giving experiencerating across borders. Should the claims paid by theinsurers and their expenses be less than the premiumspaid, a profit share or dividend is paid to the multinationalcompany8. This results in reduced costs for risk coverage.The core principle of multinational risk pooling is thatsubsidiaries buy their risk insurance from one network ofinsurers. In addition to the financial savings if claimsexperience is positive, multinational risk pooling alsoprovides other benefits, such as improved underwritingand terms, annual financial reporting globally, and moreinfluence over local insurance companies. This is whymultinational risk-pooling fits well into a pan-Europeanpension strategy, offering a stronger corporate grip onpensions in Europe.

4.Pension communication on a European scale would bringadvantages only if it concerned communication with thesupervisory authorities. This is also referred to as reducedgovernance costs. Communication with the pension fundmembers generally varies too much from country tocountry to offer real scale advantages. Social and laborlaws from country to country are usually too different toadopt a single approach.

7 Protocol relating to the Collaboration of the relevant Competent authorities of the Member States of the European Union in particular in the application of the Directive 2003/41/EC of

the European Parliament and of the Council of June 3, 2003 on the activities and supervision of IORPs operating cross-border (CEIOPS-DOC-08/06), February 2006.8 Definition taken from AEGON global pensions website on March 12, 2009.

Snapshot of the perceived barriers against the creationof a pan-European pension fund

Interpretation and implementation of the IORPDirective

• Each Member State has implemented the Directivedifferently, leading to further complexity.

• The Directive’s minimum supervisory frameworkpermits differences in the design of supplementarysupervisory measures, which makes it hard to comparethe impact of supervision.

• There is confusion about the IORP Directive oncorporate governance.

• A lot of uncertainties remain about the relationshipbetween the IORP Directive and Solvency II.

Legal and tax

• There are too many differences in social and labor lawframeworks across Member States discouragingcompanies from moving the scheme administrationoutside of their home countries.

• There are differences between the legal regimes underwhich pension funds operate in different countries(common law and civil law).

Costs

• The research needed to make such a move can be reallyexpensive.

• The lack of products on the market is hamperingprogress towards the development of pan-Europeanpensions.

• A pan-European pension fund can only start activities ifit has received authorization from each host MemberState. As described in The Budapest Protocol7, whichprovides a framework for the cooperation of supervisorsin the area of cross-borders activities, the authorizationprocess is complicated and long (see also the section“Legal Framework” for further details). This could lead todelays, and increased costs, especially if a company has asmall number of employees in a large number of EUStates.

As long as these challenges remain, progress towards a realpan-European pension fund will be slow. It is clear that fullcross-border pension solutions can be complicated ifimplemented from scratch. There are, however, a number


Combining one or more of the activities on a European scale,through shared service centers for example, could eventuallyopen the door to other areas of integration. If pension funds cannot realize these scale advantages on astandalone basis, they may choose to outsource activities toorganizations that can. Pension delivery organizations orspecialized asset managers are an option for pan-Europeanservice delivery.

Asset poolingOf the identified possible cross-border activities, the onemost commonly undertaken is asset pooling. Essentially,asset pooling by pension funds involves the investment ofcapital by two or more pensions for their joint account. Themain perceived advantages are benefits of scale, taxefficiency and greater visibility and control, not only overfinancial risk but also over some broader types of decision-making.

Asset pooling takes different forms, but in the context of thisreport, one form is particularly interesting because it canconstitute a first step towards the creation of a pan-Europeanpension fund. This is entity pooling. The assets ofparticipating funds are aggregated in a separate legal entity –an asset-pooling vehicle – that exists separately from theparticipants in the pool.

The legal entity does not change the economic entitlementsof the participating funds, but it may change the legalarrangements by which those entitlements arise. This is whya distinction needs to be made between “transparent” and“opaque” entities. Until recently, in the case of pension asset

pooling, the facility for the investor to obtain, directly orindirectly, the benefit of the reduced rate of withholding taxwas generally absent, as the pooled vehicle, due to its legalnature, might have been treated as an opaque vehicle wherethe assets were treated as belonging to the vehicle itself.Today, some countries have sought to address this issue byestablishing dedicated tax transparent vehicles, whereparticipants should be treated as investing directly in thepool of assets, and which benefit from all the advantages ofinvesting via a pooled arrangement. It specifically refers tothe fact that all income and gains are treated as arising oraccruing to each investor, as if the income or gains had neverpassed through the vehicle. At this point, dedicated assetvehicles for pension funds9 can be mentioned, such as the“Fonds voor Gemene Rekening” (FGR) in the Netherland, theCommon Contractual Fund (CCF) in Ireland, the “FondsCommun de Placement” (FCP) in Luxembourg, and thePension Fund Pooling Vehicle (PFPV) in the UK. Thesededicated asset pooling vehicles for pension funds aretransparent for tax purposes and are therefore regarded asideal vehicles because they are more efficient than opaquepools. Multinationals such as Unilever, Nestlé and IBM havealready introduced such tax transparent cross-border assetpooling vehicles, but the number of companies using themremains limited.

9 An asset pooling does not constitute a pan-European pension fund, as the local entities still have to be maintained in each “home jurisdiction” and local trustees still have to fulfill their

fiduciary duties under domestic rules. Furthermore, only assets – as opposed to assets and liabilities – may be pooled within the types of vehicles that have been launched to date.

Pension Fund

Country B

Pension Fund

Country C

Pension Fund

Country D

Pension Fund

Country A

Multinational company

Pension Fund

Country B

Pension Fund

Country C

Pension Fund

Country D

Pension Fund

Country A

Asset pooling vehicle

• Greater consistency in quality of asset management and performance

• Better control and oversight over 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

• Belgium = SICAV / FCP

• Ireland = CCF

• Luxembourg = FCP

• The Netherlands = FGR

• UK = PFPV

• This complex set-up is adding to company costs


. . . .

Asset Class 1 Asset Class 2 Asset Class 3 Asset Class 4 Asset Class 1 Asset Class 2 Asset Class 3 Asset Class 4

Figure 6. Entity asset pooling


1.3 Stakeholder views

• The stakeholders in the establishment of a pan-Europeanpension fund, apart from the regulators and supervisoryauthorities, are the companies and their employees onthe one hand and the pension delivery organizations(PDO) and life insurers on the other. The stakeholderviews, gathered through interviews and desk research,provide insightful information on considerations involvedin deciding when and where to set up pan-Europeanactivities.

Companies and employeesCompanies want pension schemes for their employees thatoffer the highest degree of certainty for the lowest costs.Apart from the obvious tradeoff, companies place additionaldemands on their pension schemes that could lead to theestablishment of a pan-European pension fund. Multinationalcompanies may want to implement a European or globalpension benefits strategy as a management instrument,offering benefits to all their employees. Or they may want toincrease the overview they have by reducing the number ofdifferent schemes scattered across the globe (and therebyreducing the risks of non-compliance).

One of the reasons to establish pan-European activities canbe to realize cost efficiencies. Governance over one largefund is cheaper than governance over a handful of smallerfunds. The IBM pension vehicle achieves scale efficienciesthrough cross-border asset pooling and cross-borderactivities relating to administration.

Other companies have also established asset pools. In 2005,Unilever launched a tax transparent asset pooling vehicle inLuxembourg (Univest) for its cross-border European pensionassets, using the FCP10. Shell Pensions set up an assetpooling structure using the FGR in the Netherlands.

Some companies believe that pooling assets is not enough togain sufficient administrative savings and see asset poolingas a first step towards a real pan-European pension fund.Nestlé, one of the pioneers in cross-border pension pooling,having begun its first fund in 2001, is going forward in 2007with the creation of Nestlé Capital Advisors (NCA). This newstructure provides actuarial and asset-liability advice andoffers a number of services, including manager selection, riskbudgeting, monitoring, multi-manager fund construction,and asset-allocation implementation for Nestlé’s 280 pension

plans worldwide. NCA also includes Nestlé CapitalManagement (NCM), an operational asset management unitwith offices in the United Kingdom and Switzerland, and fullyauthorized and regulated by the UK Financial ServicesAuthority. NCM manages part of the assets for Nestlé’s non-US pension plans and provides cross-border investment andadvisory services. Nestlé’s new, shared-services approach togroup pension fund management aims to lower costs andboost net asset performance, while strengthening Nestlé’soverview of group pension assets.

Separately, Nestlé has launched a pilot program to create apan-European pension. The project is at an early stage andNestlé is working on the clustering of a number of Europeancountries. Jean-Pierre Steiner CEO of Nestlé Capital Adviserssaid, “The idea is to pool the company’s pension assets andliabilities into a single vehicle. It is unlikely to happen on a bigscale […] but we can start using such an approachgradually”11.

This gradual approach is also in the mind of BernhardWiesner, head of corporate pensions at Bosch “A lot ispossible in a step-by-step approach. We believe that justpooling asset management is not enough and we need tobring everything together within one administration platformfirst and one legal entity […]. Our approach is to clustervarious regions and to consider amalgamation betweenregions”12.

This view of clustering similar countries or a specific group ofemployees is also expressed by Chris Siebers of TNT whenasked about the potential for pan-European pension funds.Chris Siebers mentions two examples where a pan-Europeanpension fund should be considered:1.Internationally mobile employees (e.g. expats) traveling

and working around the world and in need of good andconsistent pension benefits.

2.Emerging markets such as Central and Eastern Europe orLatin America where TNT has made a string of acquisitionsand where it runs a large number of different schemes invarious countries.

A consolidation of the many benefit schemes into one fund(or alternatively at least harmonize and combine someschemes) through a pan-European pension plan could verywell be in line with TNT’s corporate and local businessobjectives in terms of costs, benefit coverage and protection,and pension risk management. It is also theoretically

10 ENP, November 3, 2008 and Financial Director, February 28, 200811 Bfinance, Pioneers in pension pooling, Nestlé consolidates global pension assets, April 29, 2007. 12 Investment & Pensions Europe, June 2008, “The Step-by-step route towards efficiency”.


possible, because there are many similarities between thesecountries as regards the legislation governing pension funds.Olaf Sleijpen of Maastricht University refers to this as hightransferability when he compares the European countries andplaces them on a so-called characteristics index13. The newpension fund should then ideally be managed in a maturemarket of financial service providers (e.g. the administrationand investment management of TNT’s Dutch pension fund isoutsourced to TKP) with specific pension expertise as well asknowledge of local pension culture. Chris Siebers explainsthat it could be interesting, therefore, to establish a singlefund (or maybe harmonize some pension arrangements) incountries where TNT lacks sufficient benefit-managementcapacity, or in countries that have several arrangements withseveral insurers or other institutions.

A further consideration, that does include a tradeoff betweenrisks and costs, is transferring activities to countries withlower regulatory requirements. Although this couldtheoretically lead to cost reductions, this view is not broadlyshared by stakeholders. From a survey, however, CEIOPSfound indications of regulatory arbitrage and supervisorycompetition between Member States, especially in the areaof solvency requirements14.

Pension delivery organizations and life insurersThe other group of stakeholders consists of the pensiondelivery organizations and the life insurers that are lookingfor new clients. Under the IORP Directive, they can servepension funds not only in their own (home) country, but in allother European (host) countries as well.

A pension delivery organization will obviously only do so ifthe activities are profitable. According to Roland van denBrink of Mn Services, the specific administrationrequirements per country interfere strongly with profitability.Setting up an administration involves many extra costs anddoes not generate a lot of revenue. On top of that, thespecific requirements in some cases impede the realization ofscale efficiencies in administration. This is not good news forthe IORP Directive, since the administration requirements arelaid out in the social legislation of the host country, an areawhere the Directive has no force. Frans van der Horst ofAEGON Global Pensions adds that regulatory uncertaintyregarding pension pooling is another barrier to setting upinternational activities. Differences in interpretation of theDirective will not be in the interest of market parties lookingfor scale advantages across countries. That is also why

AEGON Global Pensions calls for more regulatory coherencefrom the European Commission15.

Mn Services will undertake the administration of large fundsif they are also given the asset management activities. Butinstead of offering services in the UK from the Netherlands,Mn Services has used its European passport to open a UKbranch. AEGON, too, has established an internationalpresence, not only in Europe, but in North America and Asiaas well. This will allow them to offer asset and risk poolingactivities and pension administration for institutional clientsaround the globe.

Country attractivenessIn all the interviews, the attractiveness of countries for theestablishment of pan-European activities was discussed.Luxembourg, the Netherlands and Ireland are the favoriteswhen it comes to asset pooling. Luxembourg has excellentfacilities and plenty of experienced service providers. Irelandhas the advantage of being attractive for Americans, sharingthe Anglo-Saxon culture. For pension pooling or setting up apan-European pension fund, Luxembourg and theNetherlands were mentioned. Belgium would be thepreferred choice, if regulatory arbitrage were the onlydecision criterion. However, there are more criteria involvedwhen it comes to determining the location of choice. Culturalsimilarities are mentioned, the perceived quality of thesystem and the presence of experienced service providers,and even the practical advantage of physical proximity.

13 Dr Olaf CHM Sleijpen, “On the exportability of the Dutch pension system to the European Union”, February 6, 2009.14 CEIOPS-OPSSC-01/08 Final Survey on fully funded, technical provisions and security mechanisms in the European occupational pension sector, 31 March 2008.15 AEGON Global Pensions View, Unfinished business – the EU pensions agenda and its impact on multinationals, 23 February 2009.


In this section, we compare the pension fund relatedlegislation that was implemented in Belgium, Luxembourg,the Netherlands, Ireland and the U.K., in order to obtain anidea of how these countries are trying to facilitate theestablishment of pan-European pension funds. At the sametime, the best practices and the competitiveness of theseregimes in attracting pan-European pension fund activitiesare considered. The comparison is made using the keyaspects of the organization of a pan-European pension fund:legal framework, solvency rules, investment managementprinciples, required information, ring-fencing, outsourcingand taxation.

2.1The legal framework

• Each Member State has its own legal entities for IORPs.All entities have their own establishment requirements.Because every Member State has its own entity for theIORP, there is no uniformity to be found between MemberStates. The transfer of pensions from one Member Stateto another could be obstructed by this.

• Most of the Member States have based their registrationprocedure on the Directive. Hence, the procedures toregister an IORP are very similar in the various MemberStates.

• The definitions of product determine which pension plans(products) an IORP may operate. The Member Stateshave implemented the product definitions as prescribedin the Directive differently. The limitations on thedefinitions for products should be examined separatelyfor each Member State and entity.

• Some Member States have implemented a limitation onthe groups for whom a pension plan may be operated bythe IORP. The limitations on the definitions for domainshould be examined separately for each Member State.

• In principle, there are many regulations covering theparticipation of employees, retirees and otherbeneficiaries of pension payments in The Netherlands.However, it is possible to request the supervisor (DeNederlandsche Bank) for exemption from theseregulations in the case of cross-border activities. InBelgium, participation is voluntary in principle. OtherMember States appear not to have regulations regardingparticipation.

• In conformity with the Directive, the social and laborlegislation of the country of employment is applicable tothe employees. Every Member State determines what isto be defined as social and labor legislation. This could bea restriction for sponsoring undertakings that operatepension plans in different Member States. In addition, inseveral Member States the regulations with respect toinformation and investments are also part of the socialand labor legislation.

In this section, aspects such as the legal entity for the IORP,internal organization structure, limitations on domains andproducts are discussed. In addition, the supervision of theIORP and the procedure for obtaining a European passport isdescribed. The scope and the influence of the social andlabor legislation in different countries are explained in detail.

Note: The process which an employer has to deal with totransfer the pension plan to a Member State will not beexplained. This process could be of great significance,however. For example, in The Netherlands the legislation isstrict on this aspect. The members‘ committee(deelnemersraad) has a right of prior consultation.Furthermore, the works council has to agree with theexecution of the pension plan by an IORP of another MemberState. If an employer wishes to transfer the values of existingpensions, the agreement of all individual participants in thepension plan is required. These strict regulations are part ofthe social and labor legislation. In conformity with theDirective, the social and labor legislation of the country ofemployment is applicable to the employees. It is assumed thatthe strict regulations on this aspect are similar in otherMember States.

• A. The Netherlands

Since there are so many developments in the Netherlandsregarding the new entities for IORPs, we have added aseparate paragraph on future status.

Current legal situation: Pensioenfondsen/Pension Funds

Legal entity and establishment requirementsA pension fund in The Netherlands has the legal form of afoundation. A foundation is established by a notarial deed.The directors of the foundation are required to register thefounders of the foundation at the Chamber of Commerce. InThe Netherlands, a foundation has legal personality. Somepension funds have taken the legal form of an association,which also has a legal personality. The new pension fund isrequired to report the establishment within three months tothe supervisor of pension funds and insurance companies,which is De Nederlandsche Bank (DNB).

Internal organization structureIn accordance with the principles for good pension fundgovernance established by the Foundation for Labor(Stichting van de Arbeid), the governance structure ensuresan appropriate division of operational responsibilities andsupervisory responsibilities. A pension fund is legallyrequired to set up the organization in such a way that goodgovernance is guaranteed. In any case, accountability forresponsibilities should be to the retirees and otherbeneficiaries and to the employer. For this aspect, anaccountability body has to be established. There must also be

2 Prime location for pan-European pension funds


internal supervision to guarantee good governance withinthe pension fund.

Consequently, the pension fund must consist of at least ofthree bodies:• A board of directors, which should include employees as

well as employers (retirees and other beneficiaries ofpension payments is optional). Equal representation isrequired (no limitations on board members);

• An accountability body (at least three members); • An internal supervisor.

For the organization of internal supervisor, the board ofdirectors can choose from:• Inspection reviews;• A separate body for internal supervision;• One tier board;• Audit committee.

A company pension fund is obliged to establish a members’committee if 5% of the members of the scheme requests thisby their own choice. Industry-wide pension funds are obligedto establish a members’ committee.

Role of social partnersSocial partners have to be represented equally on the boardof directors. In the Netherlands, the principle of equalrepresentation is a ground rule for the management of apension fund. The employer-board members are appointedby the employer. The employee-board members areappointed:• After election by members;• After recommendation by the members’ committee; • After recommendation by the Works Council;• Otherwise, approved by the board of directors.

The board members representing retirees and otherbeneficiaries of pension payments are appointed afterelection by these groups.

Representation and participation rulesRepresentatives of retirees and other beneficiaries ofpension payments are allowed to have seats on the board ofdirectors. However, these representatives cannot have morethan half the seats allocated to employee representatives.Representatives of retirees and other beneficiaries ofpension payments can also have seats on the members’committee.

Equal representation (based on the ratio of the number ofemployees to the number of retirees and other beneficiariesof pension payments) is a guiding principle for the members’committee. The members‘committee has a prior right ofconsultation on several subjects in relation to the board ofdirectors, whether the board asks for consultation or not. Ifthe board of directors asks the members’ committee forconsultation, the consultation must be requested at suchtime that it can be of substantial influence on the proposeddecision. The members’ committee also has the right toreceive information on several subjects. It has the right tohave the Enterprise Court in Amsterdam assess whether adecision of the board of directors is reasonable.

Representatives of retirees and other beneficiaries ofpension payments can also have seats on the accountabilitybody. The accountability body includes representatives ofmembers, retirees and other beneficiaries of pensionpayments, and employers. In principle, the seats on theaccountability body are equally divided between thesegroups. The board of directors is accountable for the policies,the way they are executed and adherence to principles ofgood pension fund governance. The accountability body has


the right to express judgment on the actions, the policyconducted, and decisions of the board of directors. This bodyhas the right to consult the external auditor and the externalactuary. It also has rights concerning the giving of advice onseveral subjects. If the accountability body is of the opinionthat the board of directors is dysfunctional, it can request theEnterprise Court in Amsterdam to investigate the policy ofthe pension fund, or investigate the performance of theboard of directors as such.

Limitations on domains and productsThe definitions of domain and product for pension funds arebilateral. Firstly, a pension fund must guarantee that theessential features of pension funds, collectivity andsolidarity, are reflected in all the products that are offered bythe fund (product). Secondly, there are restrictions on thepossibilities for employers to associate with or join a pensionfund (domain). The provisions regarding the restrictions onvoluntary continuance of the participation also belong to theproduct definition. With regard to product definitions, thereare also restrictions applying to the purchase of pensions.With regard to domain definitions, there are also restrictionsconcerning voluntary association with industry-wide pensionfunds. It is possible to associate voluntarily with industry-wide pension funds, subject to the following conditions:

• The employer applies the wage movements of the industryand participates in the social funds of that industry;

• The employer has a relationship with an undertaking thatfalls within the scope of the industry-wide pension fund;

• If the activities or the employer no longer fall within thescope of the industry-wide pension fund, the voluntaryassociation with the industry-wide pension fund can becontinued by the employer because of the historicalconnection.

A pension fund is only allowed to perform activities thatrelate to pensions.

Legal separation of sponsoring undertakings and IORPIt is legally required that a sponsoring undertaking isseparate from the pension fund, so that the assets of thefund are safeguarded in the interests of members andbeneficiaries in the event of bankruptcy of the sponsoringundertaking.

No more than 5% of the funds of the pension fund may beinvested in the sponsoring undertaking. If the sponsoringundertaking belongs to a group, investment in theundertakings belonging to the same group as the sponsoringundertaking must not be more than 10%.

DirectorsThe directors of the pension fund must be competent,honorable and reliable. With regard to competencerequirements, a distinction is made between competencerequirements set for individual directors (level 1) andcompetence requirements set for the board of directorscollectively (level 2). At level 1, a distinction is made betweenknow-how and insight. For this level, a director is familiarwith:• A number of relevant definitions per area;• The meaning of these definitions;• Where he or she can find further information; • If so, to what extent the definitions concerned are

applicable to the pension fund.

At level 2, a distinction is made between know-how, insightand judgments with regard to decision-making. In addition tolevel 1, at least two or more directors for each area at level 2are able to provide balanced judgment on the policies set bythe pension fund.

The competence requirement concerns the following areas:• Managing the organization;• Relevant laws and regulations;• Pension schemes and pension types;• Financial, technical and actuarial aspects;• Administrative organization and internal control;• Outsourcing; • Communication.

Owner of funds investedIn principle, the pension fund is the legal owner of theinvested funds. However, the pension fund and the employercan arrange in the financing agreement that the surplus ofthe invested funds will be returned to the employer. In thatcase, the Dutch Pension Act prescribes that all principles andpolicies regarding indexation for future years can becomplied with, all indexation of the past ten years can ormust be fully granted, reduction on pension entitlements andpension payments of the past ten years will be compensated,and the financial condition of the pension fund is “healthy”.The financing agreement can include other arrangementsregarding the invested funds, for example a premium holidayor additional indexation.

SupervisionDe Nederlandsche Bank (DNB) is responsible for theprudential supervision and the substantive supervision in thecase of pension plans operated for a sponsoring undertaking.The Netherlands Authority for the Financial Markets (AFM) isresponsible for the behavioral supervision. Should eithersupervisor cross into the other’s workspace, they need toreach a mutual agreement. The Ministry of Social Affairs andEmployment supervises both supervisors.


Registration procedure To carry out cross-border activities, a permit from DNB isneeded. The pension fund also has to be registered. DNBinforms the supervisor in the other Member State. Within twomonths, that supervisor informs DNB about the applicablesocial and labor legislation. If the pension fund violates thislegislation, DNB and the supervisor in the other MemberState will take action jointly to stop the violation. In the worstcase, operation of the cross-border pension plan will beprohibited.

A pension fund informs the supervisor each time of itsintention to receive contributions from a sponsoringundertaking with domicile in a Member State other than theNetherlands. This notification must be accompanied by astatement of:• The Member State whose social and labor legislation

applicable to the pension scheme applies to the legalrelationship between the sponsoring undertaking and theemployees;

• The name of the sponsoring undertaking;• The main characteristics of the pension scheme to be

performed for that undertaking.

Within three months after receiving the above mentionedinformation, DNB will give notice of this information to thecompetent authorities of the Member State of which socialand labor law is applicable to the pension scheme applies tothe legal relationship between the sponsoring undertakingand the employees. At the same time, DNB will notify thepension fund that the information has been provided to thecompetent authorities. DNB will then notify the pension fundof the information on the applicable provisions of social andlabor law received from the competent authorities.

After receipt of the notification, or two months followingreceipt of the notification from DNB that the information hasbeen provided to the competent authorities, a pension fundmay start the operation of the intended pension scheme.In the case of cross-border activities, it is possible to requestDNB for exemption from the regulations regarding equalrepresentation on the board of directors, participation ofretirees and other beneficiaries of pension payments, andthe establishment of a members’ committee. In this way, across-border entity can be created in which governanceregulations can be applied more flexibly. With this situation, apension fund can also take into account the usualgovernance rules of the Member State concerned.

SponsorCountry B

SponsorCountry C

Sponsor Country D

SponsorCountry A

Supervisory Authority Host Country A

Supervisory Authority Host Country B

Supervisory Authority Host Country C

Supervisory Authority Host Country D

IORP

8The IORP can start to operate cross-border (para . 2.5.9) and it remains theresponsibility of the IORP to ensure compliance with required provision(step 6 / para 2.5.4)

Supervisory authority

Home country

1IORP informs the supervisory authority Homecountry of its intention to accept the proposed

sponsorship (para. 2.2.2)

2IORP prepares and sends the notification file to thesupervisory authority Home country (para 2.3.1)

5The supervisory authorities Host

countries receives the information andacknowledges receipt of the information

(para. 2.5.2)

6Within three months the supervisoryauthority Host countries advises the

Home country’s supervisory authorityabout specific labor and social law

requirements, specific investment orinformation requirements the fund has to

adhere to (para. 2.5.4)

7The supervisory authority Home country passes all the information to theIORP which has to comply with the applicable regulations (para. 2.5.7)

3The supervisory authority Home country has no doubts

concerning the IORP administrative structure, the financialsituation and the good reputation and professional

qualifications of the persons managing the IORP (para. 2.4.1)

4The supervisory authority Home country passes the

notification file to the supervisory authority Host countrywithin two months (para 2.5.1)

Figure 7. The registration procedure as detailed in the Budapest protocol relating to the collaborationof the relevant competent authorities of the Member States.

Sources: CEIOPS-DOC 08/06 Appendix 4 Protocol flow chart – notification process and CBK analysis


Social and labor legislationThe pension fund is subject to the social and labor legislationof the Member State of the sponsoring undertakings. Forexample, if a Dutch pension fund operates a pension schemeof a Belgium sponsoring undertaking, the Dutch pension fundmust apply the social and labor legislation of Belgium. Thesocial and labor legislation that the pension fund shouldapply to employees of Dutch sponsoring undertakings ispublished by DNB16. It is possible that legislation oninvestment requirements are part of the social and laborlegislation of the Member State concerned. In addition, thepension fund must also comply with the regulationsregarding information to participants and retirees and otherbeneficiaries of pension payments, as well as withregulations governing investments.

Future status

Recently, there have been developments in the Netherlandsregarding the IORP Directive and the creation of an IORP. Inreply to these developments, several legislative proposalshave been introduced regarding the IORP. The variouslegislative proposals are discussed below, such as thePremium Pension Institution, the multi-pension fund and theAll Pension Institute.

Premium Pension Institution (Premiepensioeninstelling – PPI)The information below is based on a legislative proposal. Thisis the starting point for the introduction of an All PensionInstitute (Algemene Pensioen Instelling – API). The legislative proposal envisages three stages:1.PPI =>mid 2009;2.Multi-opf =>mid 2009; 3.API =>year-end 2009.

Legal entity and establishment requirementsFor a PPI, the possible legal entities are:

A “(Europese) Naamloze vennootschap” or “Beslotenvennootschap” (Plc, Ltd, Inc), or foundation established inthe Netherlands. All these legal entities are internationallyrecognized.

The establishment requirements for a “Europese Naamlozevennootschap (Societas Europea (SE))”are:• Issued capital at least € 120,000,-;• Related companies come under legislation of at least two

Member States.

The establishment requirements for a “Naamlozevennootschap (NV)” are:• Establishment by a notarial deed;• A certificate of incorporation from the Minister of Justice;• Issued and paid capital at least € 45,000;• Registered with the Chamber of Commerce.

The establishment requirements for a “Beslotenvennootschap (BV)” are:• Same as for the NV, but instead of issued and paid up

capital of at least € 45,000, there has to be paid up capitalof at least € 18,000.

The establishment requirements for a foundation are:• Establishment by a notarial deed.

It is expected that several parties will be able to establish aPPI, for example an insurer, a pension fund, an employer, or asocial partner.

Internal organizational structureThe PPI should consist of a board of directors, shareholders’meeting (in case of a NV, BV or SA) and an internalsupervisor.

In all cases, the funds invested have to be separated in anindependent legal entity (custodian).

Contrary to the current legal prescription for Dutch pensionfunds, equal representation in the board of directors of thePPI is not obliged.

With respect to pension governance, the principles forinsurers are applicable. This means that there has to betransparency from the PPI to the sponsoring undertakings.The sponsoring undertakings are obliged to inform theemployees (or works council if applicable), retirees and otherbeneficiaries.

Role of social partnersSocial partners are not necessarily represented in themanagement board of the PPI. However, it is possible forsocial partners to establish and manage a PPI.

Representation and participation rulesThe works council and representatives of the retirees andother beneficiaries of pension payments have the right toprior consultation on the service level that will be arrangedbetween the employer and the PPI. They also have the rightto prior consultation on the financing agreement, includingany extensions.

16 DNB Web Site: http://www.dnb.nl/openboek/extern/file/dnb_tcm40-158143.pdf


Limitations on domains and productsThe PPI can only be used for defined contribution schemes inwhich no risks such as death and disability are insured. Thesphere of activity of the PPI is restricted to non-recurrentpension benefits at pension date or a temporary periodicbenefit (benefit during fixed units of time). The PPI is notallowed to pay lifetime annuities, execute spouse pensions orpensions for disability. Accordingly, the funds invested haveto be transferred to an insurer as soon as the invested fundsare converted to a lifetime annuity. The PPI cannot giveguarantees for the amount of the benefits. The PPI thereforecovers only a small part of the benefits that are allowed bythe Directive. The pension premiums will be collected andinvested until the pension date by the PPI. Besides that, thePPI will do the administrative work, communicate with theparticipants in the pension plan and fulfill the obligations tothe supervisors.

According to the draft legislative proposal, the PPI can onlycarry out activities directly arising from the provision ofretirement benefits in the context of an agreement orcontract in the sphere of employment conditions.

The current draft of the legislative proposal does not containdomain definitions.

Legal separation between sponsoring undertakings and IORPThe funds of the PPI have a different owner than thesponsoring undertakings. Furthermore, the funds of the PPIcan be invested in the sponsoring undertakings to amaximum of 5% in accordance with the current DutchPension Act.

DirectorsThe PPI has to be managed by persons who are competent,honorable and reliable. The conditions laid down in theFinancial Supervision Act (Wet op het financieel toezicht) aretherefore applicable. These conditions are also applicable tomanagers of an insurer for example.

In contrast to directors of pension funds, the competencerequirements for directors of PPIs will be laid down morespecifically in the law. The details of the competencerequirements of directors of pension funds are not laid downin the law, but are recommendations of the umbrellaorganizations of pension funds.

Owner of funds investedThe legal ownership of the funds invested (assets andliabilities) is held by the custodian of the PPI. This means thatthe PPI has no legal ownership. The custodian is anindependent legal entity (no personal or financial relationshipto the PPI). The custodian can have a legal personality underDutch law, as well as under the civil law of other MemberStates. So at this point, there are no restrictions.

SupervisionDNB is responsible for the prudential supervision and for thesubstantive supervision in the case of pension plans operatedfor a sponsoring undertaking. The AFM is responsible for thebehavioral supervision. The supervision is expected to be thesame as for pension funds. Since DNB and The AFM willsupervise the PPI, it is expected that they will also supervisethe custodian. With respect to supervising the PPI, includingthe custodian, DNB and The AFM will apply the FinancialSupervision Act.

Registration procedure With respect to the registration procedure for the PPI, the sameprocedure as for a pension fund is applicable. For further details,see the section “Pension funds (current legal situation)”.

In addition to the above-mentioned procedure, a permit fromDNB is needed if the PPI operates solely Dutch pension plans.

Social and labor legislationThe PPI is subject to the social and labor legislation of theMember State of the sponsoring undertakings. For furtherdetails, see the section “Pension funds (current legalsituation)”.

Multi-pension fund (multi-opf)The information below is based on a legislative proposalconcerning a “multi-pension fund”. The objective of a multi-pension fund is to have several pension funds work togetherwithin one pension fund. This is especially interesting for thesmaller pension funds for which it is hard to cope with thestringent regulations.

Legal entity and establishment requirementsIt is not clear yet what legal entity is required for a multi-pension fund. Since a multi-pension fund is likely to beestablished by mergers of several pension funds, the legalentity of the multi-pension fund will probably be afoundation. To establish a foundation, a notarial deed isrequired. It is expected that by mergers of several existingpension funds and/or by liquidation and transfer of value amulti-pension fund can be formed.

Internal organization structureThe board of directors must include employees as well asemployers. Equal representation of participatingundertakings is required. The board of directors will beresponsible for policy as a whole. All other governanceprinciples which are required for the pension fund are alsoapplicable to the multi-pension fund. This means that themulti-pension fund is also required to establish an accountabilitybody and an internal supervisor. However, the organizations ofthese bodies will not be specified in the legislation. In general,the multi-pension fund will be required by its articles ofassociation to set up the above-mentioned bodies.


Role of social partnersJust as for the pension funds, social partners have to berepresented equally in the board of directors. The principle ofequal representation will also apply to the multi-pensionfund. Of course, in this case it applies to each participatingsponsoring undertaking individually.

Representation and participation rulesIf a multi-pension fund operates pension plans for multipleundertakings, each undertaking should be represented by atleast one representative from every segment in themembers’ committee. The multi-pension fund is also allowedto opt for representation of retirees or other beneficiaries ofpension payments in the board of directors.

However, there will be some differences for the multi-pensionfund with respect to pension funds. The board of directors ofa pension fund, which represents all segments equally, hascontrol of the pension plans of one sponsoring undertaking.The board of directors of the multi-pension fund has controlover the pension plans of several sponsoring undertakings.Therefore, the number of sponsoring undertakings within themulti-pension fund probably remains limited. The legislativeproposal includes the possibility for parties to takemanagement decisions in smaller (management groups). It isalso possible for the multi-pension fund to make otherarrangements regarding the organization of theparticipation. The persons in question can also waive directparticipation and organize several subject matters in thefinancing agreement.

Limitations on domains and productsA pension fund is only allowed to exercise activities forseveral pension plans for a single undertaking. This principleis also applicable to cross-border activities of pension funds.In the legislative proposal, it is suggested that this principleshould be adjusted to make collaboration (or mergers) ofseveral pension funds possible, otherwise it will not bepossible to establish multi-pension funds under current DutchLaw. Pension funds are only allowed to exercise activities inrelation to pensions. This product definition will also beapplicable to the multi-pension fund.

Legal separation between sponsoring undertakings and IORPThe same requirements as for pension funds will beapplicable to the multi-pension fund. For further details, seethe section “Pension fund (current legal situation)”.

DirectorsIn the legislative proposal, it is suggested that there shouldbe more requirements with regard to the competence of theboard of directors for a multi-pension fund. The backgroundis that managing a multi-pension fund demands more thanmanaging a pension fund. It is unclear at this moment howthe requirements will be set.

Owner of funds investedThe multi-pension fund is the legal owner of the investedfunds.

SupervisionDNB is responsible for the prudential supervision and for thesubstantive supervision in the case of pension plans operatedfor a sponsoring undertaking. The AFM is responsible for thebehavioral supervision. The supervision is expected to be thesame as for pension funds.

Registration procedure With respect to the registration procedure for the multi-pension fund, the same procedure as for registering apension funds is applicable. For further details, see thesection “Pension funds (current legal situation)”.

Social and labor legislationThe multi-pension fund is subject to the social and laborlegislation of the Member States of the sponsoringundertakings. For further details, see the section “Pensionfunds (current legal situation)”.

All Pensions Institute (Algemene Pensioeninstelling – API)The Netherlands is awaiting the legislative proposal tointroduce the API. Since the ministerial study andconsultation is taking place at this moment, the key elementsare known. The API will be a comparable entity to the PPI.However, a PPI can only be used for defined contributionschemes in which no risks are insured. The API can be usedfor all kinds of defined contribution schemes and for definedbenefit schemes.

The basic principles of the API are:• The API should be able to anticipate the wishes of different

parties;• Arbitration of supervision should be prevented;• If an API has access to the same decision-making

instruments for pension plans as pension funds do, theprudential supervision rules for pension funds will apply inprinciple to the API;

• The greater the authority of the board of directors, themore important is the accountability arrangement. Themore this is laid down in a contract, less participation andpension fund governance will be required.


Differences between an API and a multi-pension fund

The most important differences between an API and a multi-pension fund are summarized in the table below.

must be stated in the pension fund’s incorporationarticles;

• The pension fund must be managed by a person or entitythat satisfies the competence and reputationrequirements;

• The object of the CAA pension fund is limited to thefunding of retirement benefits and the coverage ofdisability and death benefits.

For the establishment of these entities, authorization is neededfrom the CSSF or CAA. Directors, managers, asset managers,liability managers and the scheme rules must be approved bythe CSSF in order to ensure compliance with the rules thatgovern the functioning of the pension fund, be they of a legal,regulatory, statutory or contractual nature.

Internal organizational structureA SEPCAV is a cooperative company organized as acorporate entity. It is managed by a board of directors onwhich the employer can be represented. Furthermore, thereis an annual shareholders’ meeting. Its features arecomparable to an investment fund. Beneficiaries areshareholders of the fund. For the contributions paid into thefund, beneficiaries are credited with a certain number ofshares according to the net asset value per share, which iscalculated on regular basis. Contributions can be paid by theemployer and/or the employee.

No equal representation of employer(s) andemployees required.

The PPI has no legal ownership. The custodianis the owner. For the API it is unknown at thismoment.

No limitations on domains.

According to the Directive, probably all productscan be operated.

No legal entity prescribed, but there should beseparation between the sponsoring undertakingand the API.

Board of directors

Legal owner offunds

Limitations ondomains

Limitations onproducts

Legal entity

Equal representation of employers and employees required.

The multi-pension fund is owner of the funds.

Limited to operating pension plans for the employees of thesponsoring undertakings.

The definition of products is more restricted than the definitionin the Directive.

Foundation or association.

• B. Luxembourg

Legal entity and establishment requirementsThere are three different entities for an IORP in Luxembourg. 1.The Pensions Savings Company with Variable Capital

(SEPCAV) with a legal personality, regulated by thefinancial supervisory authority (CSSF). This is a companywith limited liability. The minimum capital is € 1,000,000an amount that has to be reached within two years ofauthorization of the fund. The SEPCAV can only be usedfor defined contribution schemes;

2.The Pension Savings Association (ASSEP), an associativeform of an IORP, CSSF regulated. The technical reserves ofthe fund representing the affiliated members’ rights,should reach a minimum of € 5,000,000 after a start upperiod not exceeding ten years. This is an entity with anassociative structure that can be used for both definedcontribution and defined benefit schemes;

3.Pension funds regulated by the insurance supervisoryauthority (CAA). The CAA offers flexibility in the form of anentity for defined contributions, defined benefits and/orsupplementary benefits. This entity has to meet fourconditions:• The central administration of the pension fund must be

located in the Grand Duchy of Luxembourg to enable theCAA to carry out its role of prudential supervision withfull effectiveness;

• The principle of financial responsibility of the employer

All Pension Institute (API) Multi-pension fund (multi-opf)


An ASSEP is not a company but an association. In contrast tothe SEPCAV, the main bodies are the general meeting ofassociated members and the board of directors. Associatesare typically representatives of the sponsor of the fund orthe employer and representatives of staff and beneficiaries.Beneficiaries are creditors of the fund. Contributions can bepaid by the employer and/or the employee.

SEPCAVs and ASSEPs may be managed by an administrativeagent under the supervision of the board of the company orassociation and as approved by the sponsoring undertakingsand the supervisory authority.

In case of a CAA pension fund, one of four legal forms can bechosen:• a mutual insurance association (association d’assurances

mutuelles);• a cooperative company (société cooperative);• a cooperative company organized as a public limited

company (société coopérative organisée comme unesociété anonyme - SCoSA);

• non-profit making association (association sans butlucrative – asbl).

For a CAA pension fund, usually established in the form of anon-profit making association, a mixed representation ofemployees and the employer is not necessary.

In practice, the asbl is the most commonly used as the rulesapplying to this legal form are simple and flexible.

Corporate governance rules are very pragmatic. Pensionfunds should be well organized in terms of administration,accountancy and internal control procedures. The centraladministration must be based in Luxembourg.

Role of social partnersRepresentation of employees, as affiliated members andbeneficiaries, at the level of the governing bodies of thepension fund is stipulated in Luxembourg legislation onpension funds and particularly in the law of July 13, 2005 onSEPCAVs and ASSEPs. However, the Law allows the employerto keep control of the entity.

Representation and participation rulesGeneral meetings of shareholders or associated memberscan be organized at the level of the sub-funds only for


matters relating to these sub-funds. If needed or requiredunder the local legislation of the employer, specialcommittees can be set up either at the level of the pensionfund or at the level of the sub-funds. The Luxembourglegislation provides a maximum of flexibility in terms ofcreation, membership and authorities of such committees.

Limitations on domains and productsThe SEPCAVs, ASSEPs and the CAA pension funds can beorganized as multi-employer pension funds and can thereforeadminister several pension plans.

The SEPCAV can only be used for defined contributionschemes. The benefit can be a lump sum, a temporaryannuity or a life annuity. However, for life annuities a specialarrangement with an insurance company has to beconsidered.

An ASSEP can be used for both defined contribution anddefined benefit schemes. An ASSEP is able to pay out a lumpsum or an annuity and may also pay ancillary benefits suchas on death in service, disability pensions and payments towidows and orphans.

The CAA pension fund can be used for defined contributions,defined benefits and/or supplementary benefits in the caseof the death or disability of members. The object of CAApension funds has to be limited to the funding of retirementbenefits and the coverage of disability and death benefits.

Legal separation between sponsoring undertakings andIORPAccording to the Directive each Member State must ensurethat there is a legal separation between a sponsoringundertaking and an IORP.

DirectorsDirectors, managers, asset managers, liability managers andthe pension plan must be approved by the CSSF in order toensure compliance with the rules that govern the functioningof the pension fund, be they of a legal, regulatory, statutoryor contractual nature. In addition, the CSSF verifies, whengranting authorization, whether the organizational humanand material resources of the entity concerned are such thatthe fund can properly and professionally perform itsactivities (initial control upon setting up of the fund).Furthermore, the CSSF is responsible for ongoing supervisionof entities under its supervision. Any change to theconstitutive documents or the managing bodies is subject toprior approval by the CSSF.

A CAA pension fund must be managed by a person or entitythat satisfies the competence and reputation requirements.The management may also be provided by a professionalfund manager. If the fund manager is a legal entity, it mustbe established in the Grand Duchy of Luxembourg and have

an internal organization that is adequate for the properexercise of its mandate.

Owner of funds investedPension fund in the form of an ASSEP: Affiliated membersare creditors of the pension fund.Pension fund in the form of a SEPCAV: Affiliated membersare shareholders of the pension fund.CAA Pension Fund: Affiliated members are creditors of thepension fund.

SupervisionSEPCAVs and ASSEPs are supervised by the Commision deSurveillance du Secteur Financier (CSSF). This is also thesupervisory authority for banks, asset managers, investmentfunds and securities markets. The supervisor has a toughreputation in international markets, but neverthelessdemonstrates a responsive attitude towards innovativesolutions. SEPCAVs and ASSEPs have to appoint a custodian bankresponsible for the safekeeping of assets. The custodian bankalso has a supervisory duty with regard to investment policy.An external auditor has to approve the annual accounts.

Luxembourg takes a qualitative approach rather than aquantitative approach with regard to corporate governance,technical provisions and investments.

Registration procedure A pan-European ASSEP or SEPCAV will be controlled by theCSSF. The CAA pension fund will be supervised by theCommissariat aux Assurances (CAA). Nevertheless, there willbe collaboration between the CSSF and the CAA and thesupervisory authorities of the host Member State where thesponsoring undertakings of the pension fund are based.When preparing a pension fund authorization file for theCSSF or the CAA (articles of association, pension rules,financing plan, investment policy principles, governancerules. etc.), a notification file for cross-border activity mustbe created.

A Luxembourg-based pension fund has to notify the CSSF orthe CAA of its planned cross-border activities. The pensionfund has to prepare and send the notification file to the CSSFor CAA (including the name of the host Member State, thenames of the sponsoring undertakings, and the mainfeatures of the pension rules). The CSSF or CAA forwards thenotification file to the host Member State supervisoryauthority within a maximum of three months. The hostMember State supervisory authority has a time limit of twomonths after receiving the notification to advise the CSSF orCAA about specific national labor and social lawrequirements or any specific investment or informationrequirements the pension fund has to satisfy. The CSSF orCAA passes this information on to the pension fund.


Two months after the host Member State has been notified,or on receipt of the notification of the host country’srequirements, the pension fund may start operating thepension plans in the host Member State while complying withthe applicable regulations. The pension fund can operatecross-border. To obtain agreement to operate cross-border, itwill therefore take a maximum of five months once thenotification file has been sent to the CSSF or CAA, andtypically less than three months. The CSSF or CAA willnormally send files rapidly to the host Member Statesupervisory authority.

Social and labor legislationLuxembourg offers a working tool of great flexibility, enablingthe specific needs of multinational pension schemes to betaken into account and centralized in a single financingentity. This entity does not impose any restrictions of its own,but makes it possible to introduce any restrictions that eitherthe initiator of the pension fund or, as the case may be, thelocal law the employer might impose. The host Member State rules apply regarding social and laborlegislation provisions as well as rules on information to beprovided to the affiliated members and beneficiaries.Luxembourg did not publish a list of social and labor lawsthat are applicable for employees with an employer inLuxembourg. Luxembourg is a small country that prefers tofacilitate cross-border pension funds for other countriesinstead of facilitating their own pension funds.

• C. United Kingdom

Legal entity and establishment requirementsAn IORP may be established on the same legal basis as otherUK pension schemes, no new entity is created byimplementing the Directive. The principle options for thelegal entities are:• a trust-based occupational pension plan. Under this, a

settler (i.e. an employer) hands over responsibility forpension plan assets to trustees who then hold andadminister these assets in accordance with the terms ofthe trust; or

• a contract-based group personal pension arrangement.Under this, the members have a direct contractualrelationship with the pension provider (i.e. an insurancecompany).

Internal organizational structureIf set up under trust, the IORP would need to have either aboard of individual trustees or a corporate (company)trustee.

The composition of the trustee board if the IORP were set upunder trust would be subject to the requirements of the2004 Act regarding the nomination and selection ofmember-nominated trustees (or trustee directors, in the case

of a corporate trustee). The requirement is that at least onethird of the trustees must be nominated by the currentparticipants in the plan and then that some or all membersmust be involved in the selection process for the successfulcandidates.

Role of social partnersUK employers determine the benefit design for the pensionprovision for their employees. The member-nominatedtrustee requirements are described in the paragraph“internal organizational structure” above.

Limitations on domains and productsThere is no limit on the number of participating employers ina UK pension plan, whether or not it is an IORP. Nor are thereany requirements regarding the extent of sponsoringundertakings. In the case of an IORP, the UK pension planmust seek approval for each new employer and MemberState it proposes to accept contributions from, before itbegins accepting contributions from that employer.

The trustees or managers of UK pension plans must ensurethat the activities of the plans are limited to “retirement-benefit activities”, which are defined as operations related toretirement benefits and activities arising from operationsrelated to retirement benefits.

Legal separation between sponsoring undertakings andIORPUK legislation does not contain any specific provisionsconcerning the legal separation between the sponsoringundertaking and the IORP. However, legal separation isachieved by the way in which UK pension plans are generallyset up and the law that apply to them.

In the case of a trust-based pension plan by virtue of beingset up under trust, the assets of the pension plan are legallyseparate from those of the sponsoring undertaking.

In the case of a contract-based pension plan, the assets ofthe pension plan are legally separate from the sponsoringundertaking: they are held by the pension provider andowned by the members by virtue of their contractual rights.

DirectorsThe trustees or managers of UK pension plans must haveensured that the plan will be operated in a way which isconsistent with the requirements of the law relating topension plans.

The following requirements have to be complied with:• disclosure of information to members of pension plans;• the investment principles;• the requirements regarding trustees’ choice of

investments;• the requirements for trustee knowledge and understanding.


A person is disqualified from being a trustee director if:• they have been convicted of an offence involving

dishonesty or deception;• they are an un-discharged bankrupt; or• they have been disqualified from acting as a company

director.

The Pensions Regulator can also prohibit a person from beinga trustee of a pension plan if it is not satisfied that theperson is “fit and proper” to act as a trustee.

General (non statutory) trustee duties are based on the legalprinciples which flow from the fiduciary relationship whicharises as a result of the trust structure. The main duties are:• the duty not to profit from position as a trustee director;• the duty to act honestly and prudently;• the duty to comply with the investment authorities and

restrictions contained in the trust deed, legislation andcase law in relation to investment decisions;

• the duty to act impartially between the different classes ofbeneficiaries.

Owner of funds investedIn the case of a trust-based plan, the trustees are the legalowners of the assets. The members have a beneficial interestin those assets.

In the case of a contract-based pension plan, the membersare the legal owners of the assets.

SupervisionThe Pensions Regulator is the UK regulator of work-basedpension plans. All of the powers relating to the authorization,approval, regulation and supervision of IORPs are held by thePensions Regulator. The Regulator has the power to revoke authorization wherethere is serious, frequent or persistent failure of the UKpension plan to comply with the provisions of the IORPDirective or the provisions of UK law. The Regulator has the authority to revoke approval where thereis serious, frequent or persistent failure of the UK pension planto comply with the provisions of the notified requirements ofthe social and labor laws of any or all of the host EEA states inwhich any of the non-UK employers operate.

Registration procedure There is no separate register for UK pension entities whichare IORPs. All UK pension entities must be registered withthe Pensions Regulator. Regarding the establishment of IORPs in the UK, a two-stageprocedure – authorization and approval – must be completedbefore a UK pension entity can accept any contributions froma European employer in respect of a qualifying member ofthe UK pension entity.

Under both stages, a UK pension plan which is not a “moneypurchase plan” must meet the statutory funding objective(the SFO). A UK pension plan meets the SFO only if it hassufficient and appropriate assets to cover the amountrequired, on an actuarial calculation, to make provision for itsliabilities.

The first stage of the process for a UK pension entity tobecome an IORP is to make an application to the PensionsRegulator for general authorization. As long as the UKpension entity satisfies the requirements of the IORPDirective, UK law and (if it is not a money purchase plan) theSFO, the Regulator must grant the authorization.

The second stage is for the UK pension entity to apply to theRegulator for approval (a “notice of intention”) for the entityto accept contributions from specific employers in specificEEA host countries. The notice of intention can be submittedat the same time as, but not before or following anunsuccessful application for authorization. A separate noticeof intention must be made for each European employer andeach EEA host country from which the UK pension entity isproposing to receive cross-border contributions.

The notice of intention must include prescribed informationon the financial status of the UK pension entity and details ofthe European employer, as well as the terms of its proposedcontributions to the UK pension entity.

So long as the Regulator is satisfied that the administrativestructure, financial situation, reputation and professionalqualifications or experience of the trustees or managers ofthe UK pension entity are compatible with the specified hostEEA State, it must approve the entity to accept cross-bordercontributions from the specific European employer. It mustalso notify its counterpart in the host EEA State of the noticeintention. This approval (and notification) is required withinthree months of the Regulator receiving the notice ofintention.

Social and labor legislationThe social and labor legislation that an IORP should apply toemployees of UK sponsoring undertakings is published byThe Pension Regulator17.

17 The Pension Regulator Web Site http://www.thepensionsregulator.gov.uk/pdf/SocialAndLabourLawSummary.pdf.


•D. Ireland

Legal entity and establishment requirementsThe legal entity is a trust arrangement with trustees. A trustin its simplest form is an arrangement under which a personor a group of people hold and look after property (trustees)on behalf of others who are called beneficiaries. A trust deedis required to establish a trust. The trustees must registertheir entity with the Pension Board and must pay theappropriate annual fee. New entities must register within oneyear of their starting date.

Internal organizational structureIn most pension entities, the trustees do not actually carryout the day-to-day business of the entities themselves. Insome cases, they appoint a person within the company tolook after the running of the scheme for them. More often,they appoint a pensions consultant, a professionaladministrator or a life insurance company. Even if the day-to-day administration is delegated to others, the trustees arestill responsible for operating the pension plan. It is possibleto delegate the management of the investments to aninvestment manager for example.

Trustees may be appointed by the employer or elected by themembers.

The main parties within the trust arrangement are theemployer, the trustees and the beneficiaries. The trustees actas agents for the beneficiaries as well as the employer. Trustlaw requires the trustees to act in the best interests of thebeneficiaries while, at the same time, obliging adherence tothe terms of the trust drawn up by the employer and thetrustees.

Role of social partnersSocial partners do not play any role in the formation of apension entity. However, there is some influence fromGovernment policies or lobbies in the case of underfundedpension entities.

Regulations and Participation rulesThere are no rules applicable for participation of (former)participants or retirees.

Limitations on domains and productsThere are two basic types of pension plans:• Defined Benefit;• Defined Contribution.

A trustee should know for which type he or she hasresponsibility, as there are different requirements in respectof each type of plan.There is no specific information about the definition ofdomain. It is therefore reasonable to assume that thedefinition of domain as laid down in the Directive applies.

Legal separation between sponsoring undertakings and IORPAssets of an IORP are completely separate from theemployer. This is effected on the establishment of a trust andthe appointment of trustees holding the assets on behalf ofthe beneficiaries of the pension plan.

If an investment manager is employed to manage assets, theundertakings must comply with the Financial Regulator’sClient Money Requirements, in situations where they hold orcontrol client money or client investment instruments. Anundertaking must hold client assets on a segregated basisfrom its own assets. The auditors of the undertaking arerequired to report to the Financial Regulator on an annualbasis on whether the undertaking has complied with theClient Money Requirements. Clients must consent to theirassets being pooled with other clients’ assets.

DirectorsThe trustees have duties under trust law which include thefollowing:• operate the trust in accordance with the law and the terms

of the trust deed and rules;• act in the best interests of beneficiaries;• act fairly between beneficiaries;• act prudently and diligently;• exercise care and utmost good faith in carrying out their

duties;• seek professional advice as necessary;• supervise those to whom functions have been properly

delegated;• not profit from the trust;• be aware of possible conflicts of interest.

A trustee who is negligent, does not act in good faith or doessomething which is contrary to the rules of the trust can besued by the beneficiaries. In this case, the trustee can beheld personally liable for the whole of the amount of any losswhich occurs.

A trustee has no authority to negotiate or to vary the termsof the plan. He or she can only carry out the terms of thetrust deed and rules. No matter who appoints the trustees,they must act in accordance with the pension plan, and notas a representative of the employer or the members.

A person must not act as a trustee if he or she:• is an undischarged bankrupt, or;• has made a composition or arrangement with his or her

creditors and has not discharged his or her obligationsunder that composition or arrangement, or;

• has been convicted of an offence involving fraud ordishonesty, or;

• is a person in respect of whom a declaration under Section150 of the Companies Act has been made, restricting themfrom becoming involved in the formation or promotion of acompany for a period of time, or;


• is a company and any director of this company is prohibitedfrom acting as trustee due to any of the foregoing.

Owner of funds investedThe trustees are the legal owners of the fund and its assets.

SupervisionThe primary function of the Pensions Board is to monitor andsupervise the operation of The Pensions Act 1990, asamended, (“the Act”) and pensions development generally.The general objective of the Board in its regulatory role is tocontinue, improve and, where necessary, introduceprocedures to achieve compliance with regulatoryrequirements under various headings for occupationalpension plans and PRSAs (personal retirement savingsaccounts).

The Board’s regulatory activities are focused on ensuringcompliance with all of the requirements of the Act. In relationto occupational pension plans, the Board performs thefollowing functions;• Monitoring the timely registration of entities; • Monitoring the timely notification of changes on the

Board’s Register; • Pursuing the payment of Pensions Board fees;• Conducting investigations; • Monitoring the remittance and investment of contributions;• Monitoring the Funding Standard; • Monitoring compliance with the disclosure of information

provisions.

Registration procedure Prior authorization is required from the Irish Pensions Boardfor cross-border activities. If the authorization is granted, thetrustees must obtain approval from the Board to acceptcontributions from members outside Ireland.

Ireland-based pension entities must apply to the PensionsBoard for authorization before accepting any cross-bordercontributions. Each time an entity wishes to acceptcontributions for overseas employees, further informationmust be supplied to the Pensions Board.

Social and labor legislationIrish schemes engaging in cross-border activities must abideby the social and labor laws and information requirements, aswell as any investment requirements, applicable to pensionplan members in other EU States. The social and laborlegislation that an IORP should apply to employees of Irishsponsoring undertakings is published by the Irish PensionsBoard18.

• E. Belgium

Legal entity and establishment requirementsAn IORP should be established as an OFP (Organization forfinancing pensions). The OFP is a separate legal entity with alegal personality, solely liable for its funds and obligations. Itis specifically designed to allow a flexible governancestructure and organization. The establishment requirements are limited: the registeredoffice as well as the central administration must be located inBelgium. Furthermore, an IORP must obtain approval from thebanking, finance and insurance commission (CBFA) prior to theperformance of its activities.

An OFP can simply be created by adopting bylaws. Oneordinary member-sponsoring undertaking suffices to thatend. The bylaws do not need to be drafted by a notary nor dothey require court approval. The bylaws are published in theBelgian State Gazette.

Internal organizational structureAn OFP is characterized by great flexibility. The only legalrequirement regarding the structure is that a board ofdirectors and a general assembly must be created. Theparties setting up the OFP can structure it according to theirown needs and wishes, provided the basic double structure iscomplied with.

General assemblyThe sponsoring undertakings whose pension plans areoperated by the OFP are members of the general assembly.The general assembly has the overall supervision andoversight responsibility and may be granted broad powers.There is no such obligation for the other members andbeneficiaries of the IORP. It is convened by the board ofdirectors according to the stipulations of the OFP’s bylaws.

Board of directorsThe OFP must have at least one operational body: the boardof directors. This defines the general policy of the OFP and isresponsible for its operational activities. The board ofdirectors must have at least two members. The personscomprising the board of directors could be the sponsoringundertakings or the expert members. However, sponsoringundertakings and members must always constitute a least ahalf the board. Their term of office is a maximum of six years. In some cases, Belgian social legislation may require that theboard of directors is composed of an equal number ofemployer’s and employees’ representatives.

Other operational bodies are executive bodies which, underthe supervision of the board of directors, implement thegeneral policy of the IORP.

18 Irish Pensions Board Web Site: www.pensionsboard.ie/getFile.asp?FC_ID=423&docID=374.


An IORP must have a management structure, anadministrative and accounting organization, and internalcontrol system appropriate to the activities it carries out.This structure, organization and internal control system mustenable it to carry out the envisaged operations. They mustnot obstruct the exercise of adequate supervision of theinstitution by the CBFA.

The governance structure must ensure the appropriateseparation of operational and supervisory functions andguarantee the responsibility and competence of thoseentrusted with these tasks. The operational and supervisoryfunctions serve to encourage efficient decision-making,correct and speedy execution, transparency, and regularassessments and reviews.

Role of social partnersThe law does not explicitly give a specific role to the socialpartners. However, they may be involved in the IORP by theirparticipation in the board of directors and/or socialcommittees (see the section “Representation andparticipation rules”).

Representation and participation rulesParticipants and beneficiaries may be members of thegeneral assembly.

Furthermore, the OFP and the sponsoring undertaking maydecide to create “social committees”. This is another way toenable the participation of former participants andbeneficiaries. The composition of the committees as well astheir competencies are fixed by the parties concerned. Socialcommittees are not bodies of the IORP.

Limitations on domains and productsFor non-Belgian pension plans, Belgian legislation does notimpose any restrictions or conditions on their content.Indeed, if the pension plan can be considered in the hostMember State as a pension plan within the meaning of theIORP Directive, the OFP is authorized to operate it. However,Belgian law also limits the possibility of carrying out activitieslinked to death, invalidity and incapacity for work byauthorizing them only as accessories to retirement benefitactivities.

The operation of the pension plans by IORPs is not limited toa certain group of sponsoring undertakings.

Legal separation between sponsoring undertakings andIORPThe OFP is a separate legal entity solely responsible for itsfunds and obligations, and distinct from the sponsoringundertakings.

DirectorsEach member of an operational body of an IORP must havethe necessary professional reputation, appropriateprofessional qualifications and experience to perform theirduties.

Owner of funds investedThe OFP is a separate legal entity solely responsible for itsfunds and obligations, and distinct from the sponsoringundertakings.

SupervisionThe banking, finance and insurance commission (CBFA) hasthe remit to control IORPs. The powers of control of the CBFAare very extensive.

In accordance with the bylaws, the General Assembly mustappoint one or more auditors or audit firms belonging to theInstitute of Company Auditors and accredited by the CBFA.These accredited auditors or audit firms must ensure that theIORP has adopted adequate measures for its administrativeand accounting organization and internal control systems,with a view to complying with the regulations governing thelegal status of the IORP. The auditors or audit firms may notperform the duties of an appointed actuary, complianceofficer or internal auditor in the same IORP.

Registration procedure Prior to commencing its pension fund activities, the OFPmust apply for the IORP authorization from the Belgian(home country) competent authority, the CBFA.

The IORP must be registered by the CBFA. The registrationmust be done by submitting an application file containing thedocuments specified in the legislation (the bylaws, financingplan, statement of investment policy principles, a descriptionof the pension plans which the OFP intends to administer, themanagement agreement, and information regarding thesponsoring undertakings and the members of the operationalbodies).

The CBFA issues its decision on the application within threemonths after submission of the complete file. If the OFPenvisages engaging in cross-border activities within the EEA,the notification procedure described in the IORP Directivemust be complied with. This notification can be submittedsimultaneously with the authorization request.

Social and labor legislationThe social and labor legislation that an IORP should apply toemployees of Belgium sponsoring undertakings is publishedby the CBFA19.

19 CBFA Web Site: http://www.cbfa.be/nl/bpv/eur/pdf/bpv_eur.pdf.


2.2 Solvency rules

• Regarding solvency rules, Member States are allowed tomaintain their specific valuation methods, discount ratesand additional protection measures exceeding thedemands laid down in the Directive. This may encouragemultinational companies to select a location for theircross-border IORP in a country with the least solvencyrequirements. In our opinion, solvency arbitrage mayarise specifically from the level of the required technicalprovisions.

In relation to cross-border schemes, Belgium, Ireland,Luxembourg, the Netherlands and the UK have all adoptedlegislation that provides a statutory framework. However,this does not necessarily mean that they have allimplemented all of the solvency related rules that are statedin the Directive. In this section, we focus on some of the keypoints regarding solvency rules in Belgium, Ireland,Luxembourg, the Netherlands and the UK. The differencesstated in this report are not exhaustive.

IORP DirectiveThe Directive lays down rules for the minimum protectionthat an IORP should provide to its members andbeneficiaries. To ensure that obligations to pay retirementbenefits can be met, a prudent calculation of technicalprovisions is essential. In addition, the IORP must possesssufficient and appropriate assets to cover the technicalprovisions at all times. Furthermore, the IORP is to holdadditional own funds if it provides cover for biometric risk orguarantees certain benefits or investment performance.These conditions are the three key features of the solvencyrules in the Directive.

Regarding the level of the technical provisions, the homeMember State must ensure that:1.The IORPs create sufficient technical provisions for the total

range of the pension schemes. Cover against biometric risksand/or guaranteeing either an investment performance or agiven level of benefits is part of this total range.

2.The calculation of the technical provisions must be basedon actuarial methods recognized by the supervisoryauthorities of the home Member State. • the minimum amount of the technical provisions must be

calculated by a sufficiently prudent actuarial valuation. Itmust be sufficient to continue the pensions in payment,and to reflect the commitments arising from members’accrued pension rights;

• the economic and actuarial assumptions needed for thevaluation of the liabilities must also be chosen prudently;

• the maximum rates of interest used must be chosenprudently and determined in accordance with all relevantrules of the home Member State. These prudent rates ofinterest must be determined by taking into account:• the yield on the corresponding assets held by the

institution and the future investment returns and/or• the market yields of high-quality or government

bonds;• the biometric tables used for the calculation of technical

provisions must be based on prudent principles, takinginto account the main characteristics of the group ofmembers and the pension schemes.

Regarding the funding of technical provisions, the homeMember State must ensure that:3.The IORPs always have sufficient and appropriate assets to

cover the technical provisions in respect of the total rangeof pension schemes operated.


4.For a limited period of time, an IORP may have insufficientassets to cover the technical provisions. In such cases, theIORP has to adopt a concrete and realizable recovery plan inorder to ensure that the requirements of sufficient andappropriate assets are met again. In the event of cross-border activity, the technical provisions must always be fullyfunded in respect of the total range of pension schemesoperated. If these conditions are not met, the competentauthorities of the home Member State must intervene.

Regarding the regulatory own funds, the home Member Statemust ensure that:5.IORPs always hold additional assets above the technical

provisions to serve as a buffer if the IORP itselfunderwrites the liability for cover against biometric risk, or guarantees a given investment performance or a givenlevel of benefit. The value of these additional assets mustreflect the type of risk and asset base in respect of thetotal range of schemes operated. These assets must serveas safety capital to absorb differences between theanticipated and the actual expenses and profits and musttherefore be free of all foreseeable liabilities.

For the purposes of calculating the minimum value of theadditional assets, the rules laid down in Articles 27 and 28 ofDirective 2002/83/EC apply. These state that the availablesolvency margin must consist of assets free of anyforeseeable liabilities. A description of the assets is included.For IORPs, the required solvency margin must be equal to thesum of the following: • insofar as the IORP accepts investment risk, 4% of the

technical provisions is multiplied by the ratio, for theprevious financial year, of the total technical provisions netof reinsurance cessions to the gross total technicalprovisions. The ratio is subject to a minimum of 85%;

• insofar as the IORP accepts no investment risk, but theallocation to cover management expenses is fixed for aperiod exceeding five years, 1% of the technical provisions;

• insofar as the IORP accepts no investment risk, but theallocation to cover management expenses is not fixed for aperiod exceeding five years, an amount equal to 25% of theprevious financial year’s net administrative expensespertaining to the business in question;

• insofar as the IORP covers death risk, 0.3% of the capital atrisk is multiplied by the ratio, for the previous financialyear, of the total capital at risk retained as theundertaking’s liability after reinsurance cessions andretrocessions to the total capital at risk gross ofreinsurance. The ratio is subject to a minimum of 50%.

Solvency rules in different Member StatesThe Directive lays down only minimal solvency requirementsand the home Member State may make the calculation of

technical provisions subject to additional and more detailedrequirements. In addition, the home Member State mayrequire IORPs to hold regulatory own funds or may lay downrules that are more detailed provided that these areprudentially justified. By comparing the calculations of thetechnical provisions and the regulatory own funds, we areable to compare the minimum level of assets required indifferent European locations.

A. Calculating the technical provisionsThe following elements are important for calculating thetechnical provision:• Pensions in payment and the commitments which

arise out of members’ accrued pension rights;• Recognized actuarial method;• Discount rate;• Incorporation of prudence;• Biometric assumptions.

Pensions in payment, and the commitments which arise outof members’ accrued pension rights, will not be affected bythe location of the IORP. The level of pension rights will be adirect result of the applicable pension plans.

The recognized actuarial method may have a significanteffect on the calculated minimum technical provisions. Wedistinguish three different families of reserving methods:• The accrued benefits method (ABO);• The projected benefits method (PBO); • The vested benefits method (VBO).The ABO method takes into account the pensioncommitments which arise out of members’ accrued pensionrights, at the date of valuation. The PBO method takes intoaccount future expected salary increases until retirement.The VBO method takes into account the vested pensionrights. Accordingly, the PBO leads to a higher provision thanthe ABO and VBO methods. Belgium, Ireland, Luxembourg,and the UK all allow the ABO method20. In The Netherlands,the VBO method is used.

The discount rate used in the calculation of the technicalprovision is one of the most important assumptions. IORPs inBelgium, Ireland, Luxembourg, and the UK may all determinethe discount rate themselves while taking into account theyield on the actual assets held by the IORP and theanticipated future investment returns and/or the redemptionyields of government or other highly qualified bonds. TheNetherlands uses an interest rate curve based on a currentrisk-free market interest rate derived from a swap curve. Foreach term to maturity of the liabilities, a different discountrate applies. The interest rate curve to be used by the IORPsis published monthly by the Dutch Pensions Regulator, DNB.

20 We have not investigated whether the local authorities would agree with the VBO method.


Prudence is incorporated in the economic and actuarialassumptions. In most countries, the trustees are advised bytheir actuary regarding prudence. The Pensions Regulatorusually has the authority to intervene if it believes theassumptions are too weak.21

In accordance with the Directive, the biometric tables usedfor the calculation of technical provisions must be based onprudent principles. The main characteristics of the group ofmembers and the pension schemes have to be consideredwhen choosing the tables. Apart from prudence, therefore,the location of the IORP will have no effect on the choice ofbiometric tables used. Some countries use tables based oncurrent mortality rates. In other countries, additionalprudence is incorporated, such as a trend in mortality tables,to include the improvement in life expectancy of the planmembers.

B. Calculating the regulatory own fundsAccording to the Directive, an IORP that underwrites theliability to cover biometric risk, or guarantees a giveninvestment performance or given level of benefits, mustalways hold additional assets above the technical provisionsto serve as a buffer. The minimum regulatory own funds forthese IORPs are typically equal to 5%.

In the Directive, it is stated that, in these circumstances, theproducts offered are similar to those of life insurancecompanies and that the institutions concerned should hold atleast the same additional own funds as life-insurancecompanies do. However, it appears that there are largedifferences between the buffers which countries deemnecessary to absorb discrepancies between the anticipatedand the actual expenses and profits. Belgium, Luxembourgand the Netherlands have additional requirements regardingregulatory own funds. Only one country, the Netherlands,employs a risk-based approach to determine the buffer.

In Belgium, an IORP must always have a solvency margingreater than or equal to € 3,200,000. In Luxembourg, ruleshave been laid down regarding a minimum technicalprovision. For the ASSEP (Association d’Epargne Pension),the technical reserves should exceed € 5 million. The Netherlands has rules for risk-based capital add-ons. Theminimum regulatory own funds requirement is derived fromthe implementation of the Directive. In addition, a pensionfund must have sufficient own funds to ensure, at aconfidence level of 97.5%, that the value of the fund’sinvestments will not be less than the level of the technicalprovisions within a period of one year. This regulatory ownfunds requirement increases in line with the fund’s exposure

to risk. Depending on the fund’s exposure to risk, theregulatory own funds are typically between 20% and 35% ofthe funds’ technical provisions.The protection methods used in the various countries affectthe level of regulatory own funds required. In Belgium,Ireland, Luxembourg, the Netherlands and the UK, IORPsappear to be fundamentally different from insurancecompanies and they take a different approach to theirsolvency regulation. The relationship with the pension plansponsor is the driving force behind these differences inregulation. In addition, some countries use the securitymechanism of adapting the level of conditional targetbenefits.

C. Protection methodsIf the pension scheme is not sufficiently funded, IORPs inBelgium, Luxembourg and the UK have full or partialrecourse to sponsor support22. In the Netherlands andIreland23, no automatic recourse applies. In the Netherlands,there would be negotiations between the IORP and the plansponsor. If a funding deficit persists and cannot be made upwithin one year, benefits can be reduced.

In the UK, benefits cannot be reduced should a fundingdeficit emerge. If the employer becomes insolvent and thescheme is not sufficiently funded, the trustees can apply forthe scheme to fall under the Pension Protection Fund.Members of an eligible scheme who have reached thescheme’s normal pension age will generally receive 100%compensation. This also applies to persons who receive asurvivor’s pension or who have retired on legitimate ill-healthgrounds. There is generally no “cap” on these benefits.Members who have retired but have not yet reached thenormal pension age will generally receive up to 90%compensation. This also applies to members who have yet tostart receiving pension payments. There is a “cap” on thesebenefits. For 2008-2009, this cap is £27,770 (after takingthe 90% cap into account). The compensation provided bythe Pension Protection Fund does not extend to the provisionof any increases in pensions in payment to the level specifiedin the scheme’s trust deed and rules.

D. Calculating the required assetsIn this section, we show some different ways of calculatingthe required assets. Different methods can be used tosafeguard pension benefits. When assessing the level ofassets required, the protection methods described in thesection above should also be taken into account. The assumptions used for the calculations are described inappendix B. For all Member States, the same pension planand mortality tables have been employed. The assumptions

21 This applies to the Netherlands and the UK, among other countries. 22 Survey on fully funded, technical provisions and security mechanisms in the European occupational pension sector, March 2008.23 Survey on fully funded, technical provisions and security mechanisms in the European occupational pension sector, March 2008.


were selected from a wide range of possibilities. The resultsof the calculations shown in the table therefore give anindication of the level of the technical provision, theregulatory own funds, and the required assets for theexample pension plan.

Solvency arbitrageThe differences in required assets, which appear as a resultof the minimum amount of the technical provisions and theregulatory own funds may lead to solvency arbitrage. In ouropinion, solvency arbitrage may arise specifically because ofthe level of the technical provisions. The home Member Statemay make the calculation of technical provisions subject toadditional and more detailed requirements. As a result, theminimum amount of the technical provisions differs betweencountries. The Netherlands in particular, which uses aninterest rate curve based on a current risk-free marketinterest rate derived from a swap curve, sets a higherminimum amount for the technical provisions than othercountries. These other countries make use of therequirements of the Directive, which allows them todetermine rates of interest, by taking into account:• the yield on the corresponding assets held by the

institution and the future investment returns and/or• the market yields of high-quality or government bonds.

The lower interest rates used in the Netherlands are moreprudent than prescribed in the Directive. In this example, itappears that the technical provisions in the Netherlands are

24 Ireland and Luxembourg have not been taken into account in this table. 25 The assumed discount rate up to retirement is 6% (maximum discount rate prescribed in Belgium) and an arbitrary discount rate of 4% from retirement. An indexation of 2% has been taken

into account.26 Depending on the maturity of the liability, different discount rates apply. An indexation of 2% has been taken into account.27 Government bonds of 10 or more years’ duration yielded approx. 4% at December 31, 2008; equities are assumed to yield 3% above government bonds. Based on the assumption that the

fund is invested in equities up to retirement, this gave a discount rate of 6.5% up to retirement, including a 0.5% margin for prudence. Based on the assumption that the fund is deemed

invested in a bond portfolio (i.e. including bonds of lower security than government bonds) after retirement, the yield has been taken as 1% above government bonds i.e. 5%. The resulting

rate is reduced by 0.5% for prudence. After indexation of 2% has been taken into account, the assumed discount rate after retirement is therefore 2.5% pa.28 There in no regulatory requirement for own funds in the UK.

more than twice as large as the technical provisions in theUK. In addition, the required regulatory own funds are muchhigher in the Netherlands than in Belgium and the UK. Theinterest rate of 5% in the UK results in the lowest requiredregulatory own funds in this comparison. In Belgium, theIORP must always have a solvency margin greater than orequal to € 3,200,000. In this example, this results in arelatively high solvency margin in relation to the technicalprovisions. The risk-based capital add-ons in the Netherlandslead to the highest required regulatory own funds. In thisexample, the fund’s risk exposure requires regulatory ownfunds which are equal to 32% of the funds’ technicalprovisions.

These potential differences are already recognized in theDirective. It states that, with a view to further harmonizationof the rules for the calculation of technical provisions, theEuropean Commission must issue a report on the situationconcerning the development in cross-border activities, everytwo years or at the request of a Member State. TheCommission must propose measures needed to preventpossible distortions caused by different levels of interestrates and to protect the interests of beneficiaries andmembers of schemes.

24 Belgium Netherlands UK

Method for ABO VBO ABOcalculating actuarial reserveDiscount rate 256%\4% 262.5%\4% 276.5%\4.5%Technical provision € 14.5 million € 28.5 million € 11.8 million Regulatory own funds € 3.2 million € 9.3 million € nil28 million Required assets € 17.7 million € 37.8 million € 11.8 million Fully funded at Not specified Recovery within Recovery within all times one year two years


2.3 Investment management principles

• The local pension laws have been structured in line withthe Directive and the prudent-person rules. Moreover,some states have added additional requirements or haveemphasized certain general definitions in the Directive.The Directive does not require the appointment of adepository and/or custodian, but all states have certainrequirements for safeguarding the assets.

Within the EU, IORPs have their own investmentmanagement and custodianship rules that the MemberStates must adhere to. These rules are laid down in theDirective in Articles 18 and 19. Member States are allowed tohave their own interpretations and may lay down rules thatare more detailed. This approach has made it possible forMember States to maintain their own principles, settingadditional investment requirements, while incorporating theDirective’s framework principles based on the prudent-personconcept.

To understand the differences in the investment and custodyrequirements, we have investigated the effect of specifichome Member State requirements with respect to:• Prudent-person concept and additional Member State

requirements (Article 18);• Custodianship and protection of ownership rights (Article

19);• Most common types of entities and funds for asset pooling

(not defined in the IORP Directive).

The Member State requirements are detailed in:• Netherlands: Pension Act of December 7, 2006;• Belgium: Pension Law (IRP law) of October 27, 2006;• Luxembourg: SEPCAV and ASSEP are pension law related;• Ireland: Pension Act 1990 amended in 2002 and Social

Welfare and Pension Act 2005 (IORP Directive) andStatement of Investment Policy Principles (SIPP);

• UK: Pensions Act 1995 and Occupational Pension Schemes(Investment) Regulations 2005.

Prudent-person concept (Article 18) and additionalrequirementsThe Directive prescribes that Member States must requireinstitutions located in their territories to invest in accordancewith the prudent-person rule and, in particular, inaccordance with the following rules:(a) the assets must be invested in the best interests ofmembers and beneficiaries;(b) the assets must be invested in such a manner as toensure the security, quality, liquidity and profitability of theportfolio as a whole. Assets held to cover the technicalprovisions must also be invested in a manner appropriate tothe nature and duration of the expected future retirementbenefits;

(c) the assets must be predominantly invested on regulatedmarkets. Investment in assets which are not admitted totrading on a regulated financial market must always be keptto prudent levels;(d) investments in derivative instruments must be possibleinsofar as they contribute to a reduction of investment risksor facilitate efficient portfolio management. They must bevalued on a prudent basis, taking into account the underlyingassets, and included in the valuation of the institution’sassets. The institution must also avoid excessive riskexposure to a single counterparty and to other derivativeoperations;(e) the assets must be properly diversified so as to avoidexcessive reliance on any particular asset, issuer or group ofundertakings and accumulations of risk in the portfolio as awhole.Investments in assets issued by the same issuer or by issuersbelonging to the same group must not expose the institutionto excessive risk concentrations;(f) investment in the sponsoring undertaking must not bemore than 5% of the portfolio as a whole and, if thesponsoring undertaking belongs to a group, investment inundertakings belonging to the same group as the sponsoringundertaking must not be more than 10% of the portfolio.

Furthermore, it is stated in Article 18 that at least 70% of theinvestments should be made on a regulated market and thatno more than 30% of the assets may be denominated incurrencies other than those in which the liabilities areexpressed.

All the Member States which are covered by our survey havestructured their local pension laws broadly in line with theDirective. Some States have also specified additional require-ments or have stipulated their interpretations of certaingeneral definitions in the Directive. In the Netherlands andIreland, for example, the look-through method is applied,which prescribes pension funds to examine the investmentsof their pooled investments and other vehicles, in order toclassify the total investment portfolio. In Luxembourg, thesupervisory authorities compare the investment policies ofpension funds with the maturity terms of the pensionliabilities. In Ireland, a Statement of Investment Policy Principlesrefers to a policy statement relating to regular reviews ofinvestment performance and of risk and strategic assetallocation by the trustees.

Custodianship and protection of ownership rights (Article 19)Article 19, concerning Custodianship, does not require theappointment of a depository or custodian. Member Statesthemselves may elect to ask IORPs to appoint a depositary orcustodian. Member States have organized this throughregulations for banks and investment firms.• In the Netherlands, the Financial Supervision Act includes

the requirement for banks and investment firms tosafeguard clients’ ownership rights and make adequate


organizational arrangements to minimize the risk of theloss or diminution of clients’ assets held in custody (e.g.requirements on custodial arrangements) and for the firm’sauditor to confirm their existence and review their designeach year.

• In Belgium, the segregation of investments andsafeguarding of clients assets are covered by theregulations applying to banking institutions (Act of March22, 1993) and investment managers (Acts of April 6, 1995and July 20, 2004). Markets in Financial InstrumentsDirective (MiFID) principles should also be taken intoaccount. Every year, the auditor needs to report on this tothe regulator (CBFA).

• In Luxembourg, SEPCAVs and ASSEPs have to appoint acustodian bank to be responsible for the safekeeping of theassets. The custodian bank also has a supervisory dutywith regard to investment policy. The custodian of CAApension funds is in charge of the safekeeping and currentadministration of the assets. The function of a custodianbank for a pension fund is similar to the one that acustodian bank fulfills for an investment fund.

• In Ireland, firms authorized under the InvestmentIntermediaries Act 1995 or MiFID (i.e. investmentbusiness), must comply with the Financial Regulator’sClient Money Requirements if they hold or control clientmoney or client investment instruments. The firm musthold client assets on a segregated basis from the firm’sown assets. The firm’s auditors are required to report tothe Financial Regulator each year on whether the firm hascomplied with the Client Money Requirements.

• In the UK, the Client Assets Sourcebook (CASS) rules(specifically CASS 6, “Custody rules”) cover therequirement to safeguard clients’ ownership rights andmake adequate organizational arrangements to minimizethe risk of the loss or diminution of clients’ assets held incustody, as well as the rights related to them. CASS doesnot apply to Undertakings for the Collective Investment ofTransferable Securities (UCITS). Principle 10 of the FSA’srules (concerning clients’ assets) directly relates tosegregation and requires a firm to arrange adequateprotection for clients’ assets if it is responsible for them.As part of this protection, the custody rules require a firmto take appropriate steps to protect assets held in custodyfor which it is responsible.

Most common types of entities and funds for asset pooling(not defined in the IORP Directive)As asset-pooling structures are already broadly in place, arelevant question is what types of fund are allowed in thesepool structures. All countries allow UCITS funds, i.e. funds witha European passport which enhances certain requirements. Inaddition, the following funds exist for Asset Pooling:• Netherlands: Fund for Joint Account (FGR)• Belgium: Professional Pension Institution (IRP)• Luxembourg: Fonds Commun de Placement (FCP)and

SICAV

• Ireland: Common Contractual Fund (CCF)in UCITS or non-UCITS form

• UK: Pension Fund Pooling Vehicle (PFPV). To date, thisvehicle has not received acceptance in the marketplace.

Based on our survey of investment management principles, itcan be stated that all the Member States have structuredtheir local pension laws in line with the Directive and theprudent-person rules. Some States have also addedadditional requirements or have emphasized theirinterpretations of certain general definitions in the Directive.Some of these requirements might be very valuable today, asthere is currently more demand for transparency,governance and risk management. Although the Directivedoes not require the appointment of a depository orcustodian, all the Member States specify certainrequirements for the safeguarding of assets. Several MemberStates are reassessing whether additional requirementsshould apply to their pension funds, based on lessons learnedfrom the financial crisis and taking into account the searchfor recovery. UCITS vehicles, which are already structuredand regulated within the European community, are employedto implement asset pooling, as well as for but also local fundstructures.

2.4 Required information

• In every country, IORPs need to proactively inform theirvarious stakeholders about investment policy via annualreports, benefit statements and financial statements.Properly informing the pension fund members andbeneficiaries is one of the top priorities, one that is beingdriven by the prudential or social and labor law in thehost countries, making arbitrage between home countriesregarding the area considered here very unlikely.

Information is the lifeblood of all systems of collaboration.This also applies, therefore, to pan-European pensionschemes, for which collaboration is a core concept,irrespective of the form of the scheme. It is obvious that thevarious stakeholders want their information needs properlysatisfied on a continuous basis. The IORP Directive addressesseveral elements of these needs and the above-mentionedstakeholders. Stakeholders include active as well as non-active members of pension schemes, retirees, employers,government bodies (tax authorities, legislature, etc.) andsupervisors. The Considerations to the EU Directive also citespecific examples of documents that need to be part of theinformation provided to the various stakeholders.

As many of the activities relating to the operation of pensionschemes are outsourced, an extra dimension has been addedto the provision of information. Outsourcing itself has noeffect on the standard of information that the stakeholdersneed. However, outsourcing does mean looking at the


content of the information provision in a different light. Forthis reason, we have included a separate section onoutsourcing29.

Information flowsOne can infer from the IORP Directive that information isexpected about the organization operating a scheme as wellas about the scheme being operated. As the informationstreams flow to several parties, it is important to structurethe information provision so that it satisfies the above-mentioned requirements.

We see that in all the countries surveyed, information on thefinancial health of the operating organization, accrued rightsof members, and the investment profile used by theoperating organization is provided proactively via financialstatements, benefits statements and statements ofinvestment policy principles. In cases where members havefurther information needs, they can often individuallyrequest the information concerned from the operatingorganization, which will then provide it.

Specific reference is made to the information streamsrelating to investment-policy principles. These principlesmust always be updated if a fundamental change has beenmade to investment policy. In addition, their validity alwaysneeds to be verified at regular intervals. Information on theinvestment policy principles has to be available forstakeholders, as it is relevant for members and employers toknow who is bearing different elements of the investmentrisk. The allocation of investment risk depends on the type ofpension scheme.

The form of an information stream differs according to itstarget group. For professional stakeholders, formalinformation channels are usually adequate.

To maintain contact with the members of a pension scheme,special supplementary reports are made, as providing onlyformally required information is often inadequate for goodcommunication with them. The provision of supplementaryinformation is seen in several places.

Information stream qualityEnsuring the quality of information streams is stated by theIORP Directive as having preventive as well as repressiveforms. Article 9 of the Directive refers to “conditions ofoperation”. It describes in broad terms the minimumconditions relating to, for example:• registration of the organization operating a pension

scheme;• management of the organization operating a pension

scheme;• governance for the operation of a pension scheme;

• communication of the features of a pension scheme;• involvement of the auditor and the actuary.

The EU Directive explicitly allows the possibility for nationalgovernments to set supplementary requirements forconditions of operation if protecting the interests ofmembers or retirees demands this.

All of the countries surveyed have adequate measures inplace to ensure the conditions of operation are satisfied.Directors must have impeccable characters, with expertisebeing guaranteed by the suitable composition of a board.Adequate governance is also in place, although each of thecountries surveyed has its own areas of emphasis. TheNetherlands and Belgium clearly pay extra attention to soundpension fund management. Luxembourg, with its three typesof legal entities for operating pension funds, has differentforms of governance to match the structures of theseentities (SEPCAV, ASSEP, CAA pension funds). In Ireland andthe UK, additional external advisers to support boards ofdirectors form a powerful element.

The roles of the auditor and the actuary were mentioned byeach country. That of the actuary stands out because it isdifferent in each one. While in The Netherlands some pensionactuaries provide advisory services and others performcertification duties, one being to issue an opinion each yearon the adequacy of the provisions, in the UK and Ireland theseactuaries only need to conduct an actuarial test once everythree years. In Belgium, the role of actuary is focused onproviding advice and includes no requirement to carry outtests.

Another observation concerning cross-border pensionschemes is that there are no specific regulations applying tothem as regards privacy issues. In this context, reference isgenerally made to national legislation that is more generic interms of regulations governing privacy. Ireland and the UKhave a set of reciprocal rules for privacy matters relating tocross-border pension scheme activities.

Information for members and retireesAccording to consideration 23 to the EU Directive, providingreliable information to members and retirees of a pensionscheme is essential. Pursuant to Article 11 of the EUDirective, each Member State needs to ensure that IORPsestablished in its jurisdiction provide at least a specificamount of information to the scheme members and retirees.This makes it seem that the Directive favors a home-countryapproach, which would mean the information obligations(which vary by country) possibly being a deciding factor inthe choice of the best country for setting up an IORP. In brief,however, Articles 20(7) and 20(9) of the EU Directiveconsidered together stipulate that cross-border activities are

29 See paragraph 2.6 Outsourcing.


also subject to the relevant legislation of the country ofreceipt, a host-country approach in other words. In principle,therefore, if an IORP operates a scheme of another MemberState, the scheme will have to comply with the prudential orsocial and labor legislation of that State (host-countryapproach).

As an example, the operation of a Dutch pension scheme forwhich a Dutch sponsor pays contributions to an IORPestablished in Belgium is subject to Dutch social and laborlaws. In The Netherlands, the information obligation toscheme members and retirees is laid down extensively andprecisely in the Pension Act 2007. Parts of the Dutchinformation obligation exceed the minimum level of the EUDirective. This is the case with the obligation to provide abenefits status letter and a standard pension summary,which includes more information than the EU Directivestipulates. In this context, an interesting development in thefield of Dutch pension law governing information obligationsis the setting up of a national pension register by January 1,2011 at the latest. This follows the lead of countries likeDenmark and Sweden, where a similar online register isalready in operation. As a footnote, in mid-2008 an ExpertGroup of the European Commission made the concreterecommendation that the Commission should promote thesetting up of national pension registers, as well as havingthem all linked together30.

Pension registerThe purpose of the Dutch pension register is to provide asingle information source where every Dutch citizen canobtain a full summary of his or her accrued and futurepension rights with pension funds and pension insurersthat have a registered office in The Netherlands, and of hisor her Dutch state pension rights. In addition, the registerwill show where the rights are accrued and, hence, wheremore information can be obtained. The pension registerwill enable all Dutch citizens to see what they currentlyhave and what they will receive on retirement. The serviceprovided by the register will be free of charge andconsidered a public resource. Accordingly, it is notintended to support commercial activities.

Obtaining a potential advantage in the form of loweroperating expenses by finding a country that onlyimplements the minimum information requirements of the EUDirective is an illusion. A host-country approach is the rule.An exception could arise if neither host-country’s prudentiallaws nor its social and labor laws lay down anything asregards the information obligations. What is likely to happenin this situation is adherence to the minimum requirementsthat apply in the home country. Progressive countries in

terms of information and communication obligations mighttherefore be more expensive, albeit providing a differentlevel of service (probably a more valued one) to schemeparticipants.

Each of the countries we surveyed has its own special rulesfor the information obligations to members and retirees.Their legislation places them almost at the minimum levelrequired by the EU Directive - Belgium, Luxembourg, Irelandand the UK - or slightly above- The Netherlands. Because ofdifferences in the degree of detail and the scope of theinformation obligations between countries - and partlybecause of their relatively limited importance – we do not gofurther into this subject.

Information provision and supervisorsThe role of the supervisory authority differs from country tocountry. Hence, the information provision related to this rolediffers likewise as a consequence. The histories of thesupervisors also show great differences. In the UK, the officeof supervisor for pensions places a great deal of emphasis onthe responsibility of boards of scheme-operatingorganizations to trace those who are eligible for a pension,and is separate from the office of supervisor for insurers. Incontrast, the Dutch supervisor for pensions is also thesupervisor for insurers, and plays an active role in theseareas. The same can be said of the Belgian supervisor. TheIrish supervisor recently issued new rules and guidance forthe provision of information. Something striking are thedifferences in the time allowed to provide information. InIreland, the financial statements of organizations thatoperate pension schemes have to be available within eightmonths of the end of the financial year. In The Netherlandsand Belgium, the time allowed is six months. Luxembourg’sposition is that its supervision takes a more qualitativeapproach than a quantitative one. How far this statementreflects reality is difficult to determine. What is certainly trueis that its supervision concentrates on key areas such ascorporate governance, technical provisions and investments,and compliance with the prudent-person rule.

30 “Realizing a single labour market for researchers”, Report of the ERA Expert Group, European Commission 2008 (EUR 23321).


2.5 Ring-fencing

• Because ring-fencing is not defined clearly in theDirective, all Member States interpret ring-fencing indifferent ways;

• Ireland focuses mainly on asset pooling rather than onpension pooling;

• If ring-fencing is allowed with regard to assets andliabilities, sometimes one or two forms of ring-fencing arepermissible: between pension plans and/or betweensponsoring undertakings.

In this section, the possibility of ring-fencing is describedwith respect to assets and liabilities. It should be noted thatring-fencing is undefined in the Directive and is implementedin very different ways by the Member States.

Ring-fencing could mean any of a range of techniques fordistinguishing, segregating or separating one set of assets,liabilities, activities or operations from another. These includemethods for ensuring that particular assets and liabilities canbe identified and traced with ease, as well as techniques forprotecting one set of assets from the economic fate ofanother, such as providing them with a privileged status inthe event of bankruptcy. Forms that are more comprehensivecould involve separation of associated economic operations.This may, but need not, mean full segregation of staff ormanagement, no exchange of information, or, conceivably,absence of all other economic and financial links31.

• A. The Netherlands

All Dutch entities separate the assets of the entity from theassets of the sponsoring undertakings that contribute to theentity. Bankruptcy or insolvency of the sponsor does notaffect the assets of the entity.

Pension funds: current legal statusBy law, ring-fencing is not allowed for pension funds. Thepension plans, even if there are more plans in one pensionfund, should be one financial unit. This means that possiblefinancial deficits in one plan need to be offset by gains inothers.

Pension funds: future legal statusTo make The Netherlands more attractive for other MemberStates, the following entities have been introduced inlegislative proposals. The possibilities for ring-fencing forthese entities are described below.

Premium Pension Institution (PPI)A PPI has to place the assets and liabilities with a custodian.In this way, ring-fencing is possible by choosing several

custodians or having several separated contracts with onecustodian. This will allow ring-fencing between pension plansin The Netherlands after adoption of the legislative proposal.In case of underfunding by the PPI or its bankruptcy, theassets of the pension plans will not be affected. Ring-fencingprevents pension plans with a low return on investmentbenefiting from pension plans with a higher return oninvestment.

The relationship between a PPI and a custodian must be setout in a formal contract.

Multi-pension fundsRing-fencing will be allowed for the multi-pension fund foreach sponsoring undertaking and/or pension plan. For thelatter, only if the plans were separately registered beforeentering the multi-pension fund. However, the sponsoringundertakings are free to opt for a single financial entity,which will lead to mutual solidarity.

All Pension Institute (API)Ring-fencing will probably be allowed for an API. In that case,we expect that APIs may be allowed to ring-fence betweensponsoring undertakings and/or between pension plans.

• B. Luxembourg

A major aspect of the flexibility offered by Luxembourgpension funds lies in the possibility of setting up a pensionfund as an umbrella structure, comprising different subfunds.Although the pension fund constitutes one single legal entity,each subfund within such an entity represents a separatedportfolio of assets and liabilities. The subfunds within theumbrella fund are in principle ring-fenced, which means thateach subfund is only responsible for its own liabilities. Nocross liability between subfunds arises.

Since each subfund is allowed to operate according to its ownrules, Luxembourg pension funds can adapt to the needs ofmultinational companies that intend to provide multiplepension schemes for their employees. Subfunds can beestablished to meet specific requirements in terms ofbenefits (DC and/or DB plans), investment policy or in orderto comply with specific requirements imposed by the legalprovisions applying to a given host State employer. Luxembourg pension funds must have pension rules. Thesecan comprise a general set of rules applying to the pensionfund as a whole, and specific parts that target individualsubfunds. For employers sharing the same subfund, it ispermissible to establish pension rules per employer and thusto take into account each employer’s legal requirements,such as the waiting period before rights are vested.

31 Simon Amot, A legal Commentary on Directive 2003/41/EC, October 2004.


• C. United Kingdom

All UK pension entities (whether contract-based or trust-based) segregate the assets of the entity from the assets ofthe sponsoring undertakings that contribute to the entity. Inthe case of a defined benefit pension plan, if the sponsoringundertaking becomes insolvent, the pension entity may haveinsufficient assets to provide all of the promised benefits infull. In these circumstances, the funding shortfall wouldbecome a debt payable by the sponsoring undertakings.However, the pension entity would not have priority overother unsecured creditors in respect of the debt.

The Regulator is allowed to issue a ring-fencing notice to thetrustees or managers of a UK pension scheme if it hasreasonable grounds for believing that there is, or might be, amisuse or misappropriation of the assets of the entity, orthat there exists a material threat to the interests of themembers who are qualifying employees of a Europeanemployer. There are two options for the ring-fencing: • an accounts-based division of the assets and liabilities of a

scheme attributable to the European employer to whomthe ring-fencing notice was given;

• the actual physical segregation of assets attributable to aspecific European employer.

The UK pension entity may then be required to providedetails of the assets and liabilities of the entity to theRegulator within three months of the ring-fencing notice. Or,if the Regulator believes that there is a material threat to theinterests of members who are qualifying employees of aEuropean employer, the Regulator may direct the trustees or

managers of the entity to allocate the contributions from theEuropean employer in respect of such members to a separatesection of the scheme.

In its review of the consultation, the UK’s Department ofWork and Pensions (DWP) states that it sees no reason toamend the ring-fencing requirement at this stage and willawait with interest further possible guidance from theEuropean Commission or its working parties on the meaningand scope of ring-fencing.

• D. Ireland

Ring-fencing is not allowed for an IORP. Asset pooling isallowed and is the main focus for Ireland, rather than pensionpooling.

• E. Belgium

Different pension plans may be managed globally. However,an OFP is free to decide differently and organize ring-fencingon a voluntary basis between different pension plans. TheOFP can also determine itself the degree of solidarity itdesires to apply amongst its sponsoring undertakings. Theserules need to be laid down in the management agreement.

Differences in ring-fencing

The most important differences in ring-fencing aresummarized in the table below.

Ring-fencing

Not allowedAllowed between pension plansAllowed between sponsoring undertakings and/or pension plansAllowed between pension plansAllowed between sponsoring undertakings and/or pension plans by creating subfundsOne of two options allowed:1. segregation of assets and liabilities of a scheme of a European employer2. physical segregation of assets attributable to a European employerAsset pooling is allowedPension pooling is not allowedAllowed between pension plans

Country

The Netherlands Pension fundsPPIMulti-OPFAPI

LuxembourgUnited Kingdom

Ireland

Belgium


2.6 Framework outsourcing

• Although most supervisors have issued guidelines thatdetail compliance with consideration 25 to the Directive,relating to outsourcing, implementations in practice vary.Some supervisors (in Ireland for instance) requireregistration of service providers and actively auditadministration service standards. In other countries, likethe UK and Belgium, the supervisor exercises morerestraint.

As mentioned above, most pension funds nowadays in theEuropean Union have “transferred functions of materialimportance such as investment management, informationtechnology or accounting to other companies” (see Directive,consideration 25). In other words: most trustees outsourcenot only the investment management and/or custody of theirfunds, but also the actuarial services, as well as theadministration of certain functions which includemaintenance of the scheme’s accounting and/or membershiprecords, processing of the pension payroll, collection andinvestment of contributions paid by the employer, collectionand payment of benefits, and transfers.

The reasons for doing this are obvious and universal: notonly do trustees not always have first-hand accounting,actuarial or other relevant experience, in most cases it ismore cost effective to outsource some functions to providerswho operate on a large (international) scale and can providethe services at a low cost. Only the very largest funds usuallyprefer to keep these functions in house, even at relativelyhigh costs, because they prioritize being in control.Nevertheless, the current economic situation puts pressureon this preference.

In a situation where one needs to be able to rely on theadvice or services of experts to fulfill one’s responsibilities tosafeguard the interests of one’s scheme members,transparent criteria, measurement and monitoring arecritical.The most important demands the funds pose on the serviceinstitutions are for quality (error-free, experience,compliance to strategy as well as regulations), cost-effectiveness, and timely response. Parties generally agreespecifics in a service level agreement. Ideally, the trusteesset up clear guidelines and restrictions on the investmentstrategy, and the investment managers report back to thetrustees on a regular basis on the performance of theinvestments. Meetings are also held with all parties (includingadministrators) and all significant issues are tabled anddiscussed.

Consistent quality of service, transparent procedures and anadequate internal control system are assets competitiveservice providers like to demonstrate. The number of(international) service providers offering a third-party report

to their clients (based on SAS70, FRAG or AAG standards)increases.

Regarding the Directive’s request that “it should be possiblefor the rights to information and powers of intervention to beenlarged so as to cover these outsourced functions in orderto check whether those activities are carried out inaccordance with the supervisory rules”, current practicediffers from country to country. In most countries,investment managers and custodians are already regulatedby the financial regulators, who are requesting similarenlargement. The impact of Consideration 25 on otherservice providers relates to the interpretation of the localsupervisory body’s role in a particular country. Althoughmost supervisors have issued guidelines that detailcompliance with this consideration, practicalimplementations vary. Some supervisors (in Ireland forinstance) require registration of service providers andactively audit administration service standards. In othercountries like the UK and Belgium, the supervisor exercisesmore restraint. In the near future, we expect increasingconvergence of these interpretations.

2.7 Taxation

• The current tax regimes for pan-European pension fundsare nearly equivalent, with the exception of theapplication of the VAT regimes. In other words, there isthe paradox that different interpretations of the EUharmonized VAT legislation lead to the greatestdistortion in the tax treatment of a pan-European pensionfund. Luxembourg and Ireland seem to have the best VATregime for pan-European pension funds.

The framework for taxation plays an important role in thedevelopment of a European market for occupational pensionsinstitutions. As a general rule, an IORP that operates on across-border basis should not be confronted with taxobstacles that a purely domestically operating IORP wouldnot encounter, otherwise a pan-European pension fund wouldnot be a viable way to further develop a European market forretirement provisions. Secondly, some EU Member Statesmay have established a tax environment that is more suitedto attract pan-European pension funds than others are. The European taxation framework for an IORP will addressthe following issues:• the tax neutrality for payments of pension premiums to a

non-resident IORP;• the taxation of pension benefits;• the taxation of the IORP itself;• the ability to benefit from tax treaties with respect to

cross-border investment income of the IORP;• the VAT regime applicable to services provided to an IORP.


Tax neutrality for payments of pension premiums to a non-resident IORPMost EU Member States have established a framework fortaxation of pensions under which the payment of a pensionpremium by an employee into a qualifying pension plan isdeductible when computing income from employment.Likewise, the contribution of the employer into the pensionplan of the employee would normally not be included in thetaxable income from employment of the employee. As acounterpart, the retirement benefits paid to the employeeupon retirement will be subject to income tax. Within the EU,it has taken a number of years to establish that such a taxregime should apply regardless of whether the pension planis administered by a domestic pension provider or by apension provider in another EU Member State. This taxneutrality has been established by taxpayers and theEuropean Commission through litigation at the EuropeanCourt of Justice (ECJ).

In the Danner case,32 the ECJ was asked to decide whethertax legislation of a Member State (Finland) restricting ordisallowing the deductibility from income tax of voluntarypension scheme contributions to pension providersestablished in another Member State (Germany), whileallowing such contributions to be deductible when they arepaid to insurance institutions established in the first-mentioned Member State, was contrary to the provisions ofthe EU treaty on the freedom to provide services.

The ECJ held that the freedom to provide services33 was tobe interpreted as precluding a Member State’s tax legislationfrom restricting or disallowing the deductibility for incometax purposes of contributions to voluntary pension schemespaid to pension providers in other Member States, whileallowing such contributions to be deductible when they arepaid to institutions in the first-mentioned Member State, ifthat legislation does not at the same time preclude taxationof the pensions paid by the above-mentioned pensionproviders.

The Court based its decision on the fact that the bilateral taxtreaty between Finland and Germany had created aframework for the taxation of pension benefits (taxation inthe state of residence of the recipient) and that the EUdirective on mutual assistance between Member States intaxation matters allowed Member States to enforce suchtaxation framework by mutual cooperation. Furthermore, theMember State concerned could obtain any requiredinformation from the taxpayer and from the pensionprovider.

In the Skandia-Ramstedt34 case, the ECJ argued similarlythat the freedom to provide services precludes an insurancepolicy issued by an insurance company established in anotherMember State which meets the conditions laid down innational law for occupational pension insurance (apart fromthe condition that the policy must be issued by an insurancecompany operating in the national territory) from beingtreated differently in terms of taxation from a policy issuedby an insurance company operating in the national territory.Otherwise, there could be income tax effects which,depending on the circumstances of the individual case, mightbe less favorable.

These principles were further reinforced in the infringementprocedures against Denmark35 and Belgium36. Here the ECJclearly established that tax benefits that are granted inconnection with premiums paid to domestic institutions forpensions or life insurance should be granted in the samefashion if such payments are made to institutions establishedin another Member State. If not, the Member State violatesthe principles of freedom to provide services and freemovement of workers, as well as the freedom ofestablishment for the self-employed.

With respect to the deductibility for income tax purposes ofcontributions to a pension plan or insurance contract, thecase law of the ECJ is clear. There should be no obstacles incontracting with a non-resident pension provider in anotherEU Member State. A pan-European IORP will therefore beable to make use of these principles in building its Europeanbusiness.

Taxation of pension benefitsThe OECD Model Tax Convention, that serves as the modelfor the bilateral tax treaties concluded between EU MemberStates, provides in Article 18 that private pensions paid to aresident of a Contracting State in consideration of pastemployment must be taxable only in that State. The keyconsideration for this allocation of exclusive taxingjurisdiction to the state of residence is that the state ofresidence is best suited to take into account all circumstancesdetermining the ability of the individual to pay. Furthermore,if a taxing right were to be allocated to the state of source,the question would arise how to define the state of source.Potential candidates according to OECD would be the statewhere the pension fund is established, the state where theemployment was exercised, and the state where the taxdeduction was provided.

32 Decided on October 3, 2002, Case 136/00.33 Governed by Article 49 of the EU Treaty.34 Decided on June 26, 2003, Case 422/01.35 Decided on January 30, 2007, Case 150/04.36 Decided on July 5, 2007m Case C 522/04.


The set-up of a pan-European IORP would not in itself createa need to change this bilateral allocation rule. Under theOECD allocation rule, the location of the IORP would beirrelevant in determining the taxing rights over the pensionpayments. It would remain the state of residence of theformer employee that would have the exclusive taxing rights.If however, the Member State where the IORP is establishedwere to have a different tax treaty policy and retain orintroduce a taxing right over the pension payments by virtueof the IORP being established there, that would clearly havea negative influence on its attractiveness as a location for apan-European IORP.

Taxation of the IORP itself In establishing the taxing regime for the IORP, a MemberState may elect to subject the IORP to corporate income taxas a normal corporate taxpayer. It may also add rules that,when computing taxable income, the IORP may form specialreserves similar to those of the taxing regime for lifeinsurance companies. Alternatively, Member States mighthave regimes under which pension funds are exempt fromcorporate taxation; they may see the pension fund as a pass-on vehicle where pension premiums are invested to generateinvestment income and capital gains which are then passedon as pension benefits. A pension fund as such would thusnot earn a profit, as all investment earnings are ultimatelypassed on as retirement benefits. Not taxing investmentreturns and capital gains in the hands of the IORP is clearly afavorable feature of the taxing regime for an IORP.

Ability to benefit from a tax treaty network and other taxbenefitsWithholding taxes on foreign investment income may bereduced if the benefits of a bilateral tax treaty are availableunder the OECD tax treaty framework. In order to be entitledto treaty benefits, the recipient of the income needs to be aperson and a resident of one of the contracting states. Thedefinition of the word “person” in Article 3, subparagraph aof the OECD Model Tax Convention (“Convention”) is notexhaustive and should be read as indicating that the termperson is used in a very wide sense. It is commonly thoughtthat pension funds are regarded as persons. To be a resident,however, requirements that are more stringent apply. Inorder to qualify as a resident, one should be liable for tax byvirtue of residence, place of effective management oranother criterion of a similar nature. Whether states in fact impose tax on the entity should not bethe deciding factor. From paragraph 8.2 of the commentaryto Article 4 of the Convention, it follows that fully exemptpension funds may be exempted from tax, but they areexempt only if they meet all of the requirements forexemption specified in the tax laws. Hence, they are liable fortax of a contracting Member State. If they did not meet therequirements imposed by the tax law, such pension fundswould be obliged to pay tax. The commentary to theConvention claims that most states would therefore viewexempted pension funds as residents for tax treaty purposes.Apparently, not all OECD Member States agree with thisprinciple, and therefore it is laid down in the Commentarythat these states are free to address the issue in their


bilateral treaty negotiations. Greece explicitly adopts thelatter view (paragraph 26.2 of the commentary to Article 4of the Convention). In order to secure tax treaty benefits forpension funds that are tax exempt, on a reciprocal basis, theOECD has suggested the following language to be included inbilateral tax treaties:

“Notwithstanding any provision of this Convention, anyamount paid from a pension scheme to a resident of aContracting State which arises from sources in the otherContracting State must be exempt from tax in the first-mentioned State if that pension or other amount would beexempt from tax in the other State if the recipient were aresident of that other State.”

This principle is in fact embedded in European tax law, basedon the principle of free movement of capital as clarified bythe ECJ in the cases of Denkavit37 and Amurta38. Based onthese cases, a Member State that provides tax benefits to atax exempt domestic pension fund39 must provide the samebenefits for income from domestic sources that is earned bya pension fund in another EU Member State if such pensionfund is tax exempt in that Member State. To clarify: if Frenchtax legislation provides tax benefits with respect to Frenchincome from dividends or real estate earned by a tax exemptFrench pension fund, such benefits should be available alsoto a pan-European IORP established in another EU MemberState in case where that EU Member State treats the IORP asa tax exempt entity40. The reasoning behind this principle isthat if Member State A where the IORP is establishedexempts the IORP from tax, then any withholding tax leviedin Member State B, where the dividend arises, will not becredited against any corporate tax payable in Member StateA and consequently this would be a barrier to cross-borderinvestment by the IORP of Member State A and to cross-border attraction of capital by companies established inMember State B. Since these decisions are based on the free movement ofcapital, they are also relevant to pension funds established innon- EU countries such as the United States or Japan; the EUrules on free movement of capital are also applicable to non-EU countries.

The VAT regime applicable to services provided to an IORP.As an IORP is a financial services organization, the servicesprovided by it will largely be exempt from VAT. Consequently,any input VAT that is charged to the IORP by third partyservice providers will be a cost for the IORP. Since VAT is aharmonized tax within the EU, distortions in the competitiveposition of an IORP linked to the place where it is established

should not occur. Nevertheless, since EU Member States mayinterpret this harmonized EU VAT law in a different way, inpractice, distortions may still occur when one Member Statelevies VAT on a specific service rendered to a pension fundwhile another Member State does not. Similar distortionscould occur where Member States take different views onwhere a service is rendered for the purposes of applying theVAT rules. If a services is/was deemed to be rendered outsideof EU, it would not be subject to VAT.

Summary of main rules for IORPs in selected jurisdictionsBelow is a summary of the general principles applying topension funds in the selected jurisdictions. It does notdiscuss exceptions to the general principles.

37 Decided on December 14, 2006, Case C 170/05.38 Decided on November 8, 2007, Case C 379/05.39 An example would be a refund of withholding tax on dividends paid by domestic companies to a domestic pension fund.40 Decisions of the FrenchEtat of October 27, 2008 and February 13, 2009.

Corporate tax exemptionTax exemption of entity orincome:

Taxable entity?

Seen as a resident for taxtreaty purposes bydomestic authorities?

Withholding tax on pensionbenefits paid to resident

Withholding tax on pensionbenefits paid to non-resident intreaty jurisdiction?

Asset management feescharged to pension fundsubject to VAT?

Custody and safekeepingsubject to VAT?

Place of supply for custodysafekeeping at customer (= pension fund)?

Netherlands, Ireland, U.K.

Luxembourg (SEPCAV, ASSEP,regulated pension fund:but limited tax base) Belgium

Yes, in all cases

Yes, except Luxembourg, whichapplies a TEE system

No, generally not, based on taxtreaty principles.

Yes, except for Luxembourgand Belgium

Yes, except in Luxembourg andthe UK for global custodycharged to an investment fund

Yes, except for Ireland and UK(place where supplier isestablished)


• So far we have seen two business models emerging forthe establishment of a pan-European pension fund orIORP. The starting point for each model is different,leading to differences in perspective. Both models can beimplemented in a step-by step approach and both couldeventually lead to a fully operational pan-European IORP.

The first model starts from the perspective of a multinationalcompany that is interested in implementing a pan-Europeanretirement framework as a building block of its human resourcespolicy, as well as implementing better control and managementinstruments in managing the costs and efficiencies of theretirement framework. This is called the single corporate model.The second model starts from a pension delivery organization orlife insurer that is interested in servicing additional pensionfunds, called the multiple clients model.

3.1Single corporate model

• Multinational corporations typically have employeesthroughout Europe and around the world. These employeesbelong to different pension schemes, sometimes evenseveral in each country. This implies that a multinationalcorporation sponsors a multitude of national pensionschemes. For developing a pan-European IORP, wedistinguish three phases.

Phase 1The first step multinational corporations can take is to centralizethe asset management and related functions of the differentpension plans. This leads to scale efficiencies, since there areless asset managers needed and there will be fewer transactions.In addition, managing a larger pool of assets may increase riskmanagement options by allowing for a larger diversity of assets.For the company and the fund trustees, it is important that thetax cost of the asset pooling structure is not increasing. In manycases, tax-transparent vehicles can be used for this type of assetpooling, thus securing tax benefits that pension funds mighthave under tax treaties or based on case law of the ECJ.Multinational asset pooling is in fact the most common formtoday.

3 Emerging Business Models

Single corporate model: Phase 1 Centralized investment management = asset pooling

.

...

Service Provider 3

Service Provider 2

Pension FundCountry A

SPONSOR

Country A

SPONSOR


.

SPONSOR

Country B

SPONSOR

Country C

SPONSOR

Country D

Pension FundCountry B

Pension FundCountry C

Pension FundCountry D

Pension PlanPension Plan

Pension Plan

Pension Plan

Pension Plan

ASSET

POOLING

Asset Class 1

Asset Class 2

Asset Class 3

Service Provider 1

ALM Studies

Asset Allocation

Investment Management

Investment Reporting

Performance Management

Custody

Securities Lending

Tax Management

The other activities of the pension

fund remain the responsibility of

the local pension fund:

• Pension administration

• Risk Management

• Pension Communication

• Belgium = SICAV / FCP• Ireland = CCF• Luxembourg = FCP• The Netherlands = FGR• UK = PFPV


Phase 2.The next step would be to aggregate other activities under asingle service provider: the pension fund competence center.Apart from managing the asset pooling structure on behalfof the corporate pension plans, the pension fund competencecenter could provide advisory services in pension design,actuarial analysis, financial engineering, risk pooling,accounting and other such services to the pension fundtrustees as well as to the pension fund sponsors. There stillmight be a need for local benefit payments andcommunication with participants, but more harmonization ofthe pension plans would allow for more centralization.

Phase 3.The final step is to combine all pension fund activities into onevehicle, including the assets and the liabilities: the IORP. Themultinational corporation can profit from scale advantages inall areas. Bringing the liabilities together means that the riskscan be pooled. The multinational corporation now has aneffective instrument to manage pension benefits as an integralpart of the HR rewards framework on a multinational basis.Even at this stage, the IORP may choose to outsource some ofits activities to a pension delivery organization. This modeldoes require the pension plans to be relatively similar, so thateconomies of scale in pension administration can be achieved.Within the IORP, the pension plans could be managed in a ring-fenced environment, but still allowing for benefits from riskpooling across the plans.

Asset Management• ALM

• Investment Management

• Risk Management

• Reporting

• Etc.

Advisory Services• Pension plan construction

• Financial Engineering

• Actuarial

• Tax and Legal

• Compliance

• Accounting

Pension Administration and Communication• Communication

• Collection and Payment

• Administration

Risk Management and Risk Pooling• Longevity

• Disability

• Mortality

• Etc.

.Pension Fund

Country ASPONSOR

Country A

SPONSOR


SPONSOR

Country B

SPONSOR

Country C

SPONSOR

Country D

Pension FundCountry B

Pension FundCountry C

Pension FundCountry D

Pension Plan

Pension Plan

Pension Plan

Pension Plan

Assets and liabilities remain at the pension fund level

Sponsor pensions competence center

Single corporate model: Phase 2 Centralization through pensions competence center

Single corporate model: Phase 3 Centralization through IORP

.SPONSOR

Country A

SPONSOR


SPONSOR

Country B

SPONSOR

Country C

SPONSOR

Country D

Pension SchemeHost Country A

IORPHome Country

• The pan-European pension fund

operating cross-border will be

supervised only by the Home Member

State supervisory authority

• Assets and liabilities pooled

Pension SchemeHost Country B

Pension SchemeHost Country C

Pension SchemeHost Country D

Benefits paid to participants in plan A

Benefits paid to participants in plan B

Benefits paid to participants in plan C

Benefits paid to participants in plan D


3.2 Multiple clients model

• Pension delivery organizations (PDOs) are specialized inproviding services to pension funds, such asadministration, asset management and advisory. Theytraditionally operate at national levels, since pensionfunds operate nationally, too. Offering their services on aninternational level increases their market opportunitiesand may lead to pan-European pension activities.

Multiple clients model: Phase 1 Outsourcing investment management = asset pooling

...

Service Provider 3

Service Provider 2

Pension FundSPONSOR 1

.

SPONSOR 2

SPONSOR 3

SPONSOR 4

Pension Fund

Pension Fund

Pension Fund


Pension Plan

Pension Plan

Pension Plan

ASSET

POOLING

Asset Class 1

Asset Class 2

Asset Class 3

Service Provider 1

ALM Studies

Asset Allocation

Investment Management

Investment Reporting

Performance Management

Custody

Securities Lending

Tax Management

The other activities of the pension

fund remain the responsibility of

the local pension fund:

• Pension administration

• Risk Management

• Pension Communication

SPONSOR 1

SPONSOR 2

SPONSOR 3

SPONSOR 4

Asset Manager

Phase 1The first level of aggregation is pooling asset management onan international scale. PDOs can offer this service to a widevariety of international pension funds. This means that the PDOcan achieve scale efficiencies from asset management on aninternational level. It is obvious that PDOs are active on thesame market as life insurers and asset managers. Again, for thepension funds, it is important that there is neutrality from a taxpoint of view when entering into an asset pooling structure.


Phase 2The PDO can increase its service offerings in this model toinclude pension administration and advisory services. ThePDO has the advantage of being able to aggregate theadministration of several pension funds on a national level,so it can realize scale efficiencies. It would seem that a PDOwould set up service lines on a per-country basis, to achieveeconomies of scale by servicing pension plans on a percountry basis.

Multiple clients model: Phase 2 Centralization through outsourcing


SPONSOR 2

SPONSOR 3

SPONSOR 4

Pension Fund

Pension Fund

Pension Fund


Pension Plan

Pension Plan

Pension Plan

SPONSOR 1

SPONSOR 2

SPONSOR 3

SPONSOR 4

Assets and liabilities remain at thepension fund sponsor level

Country A


SPONSOR 2

SPONSOR 3

SPONSOR 4

Pension Fund

Pension Fund

Pension Fund


Pension Plan

Pension Plan

Pension Plan

SPONSOR 1

SPONSOR 2

SPONSOR 3

SPONSOR 4

Country B

Assets and liabilities remain at thepension fund sponsor level



• Risk Management

• Reporting

• Etc.



• Actuarial

• Tax and Legal

• Compliance

• Accounting



• Administration


• Disability

• Mortality

• Etc.



• Risk Management

• Reporting

• Etc.



• Actuarial

• Tax and Legal

• Compliance

• Accounting



• Administration


• Disability

• Mortality

• Etc.

Pension DeliveryOrganization

(PDO)

PDO BranchCountry A

PDO BranchCountry B


Phase 3Finally, a PDO can also decide to establish an IORP that willtake on the pension fund’s assets and liabilities. With thismodel, it seems less likely that the benefits of risk poolingbetween the different plans can be achieved, as these plansbelong to different sponsors.

Multiple clients model: Phase 3 Centralization through IORP

Benefits paid to participants in plan 1








.

• The pan-European pension fund operating cross-border will besupervised only by the Home Member State supervisory authority

• Assets and liabilities pooled

PensionScheme

SPONSOR 1SPONSOR 1

SPONSOR 2

SPONSOR 3

SPONSOR 4

PensionScheme

SPONSOR 2

PensionScheme

SPONSOR 3

PensionScheme

SPONSOR 4

PensionScheme

SPONSOR 5SPONSOR 5

SPONSOR 6

SPONSOR 7

SPONSOR 8

IORPHome Country

PensionScheme

SPONSOR 6

PensionScheme

SPONSOR 7

PensionScheme

SPONSOR 8

Country A

Country B


Ernst & Young would like to express its gratitude to all those who participated in this study. Their input and enthusiasmwere indispensable for the realization of this report.

Interviewed: Frans van der Horst (AEGON Global Pensions); Ruud Hommes (Pensionfund IBM Netherlands); Roland van denBrink (Mn Services); Chris Siebers (TNT).

The Netherlands: Ted Braakman, Ton Daniels, Michel Voets, Rutger Mijnen, Michael Visser and Lucas Woltring of Ernst &Young Belastingadviseurs LLP; Nicolette Opdam and Bianca van Tilburg of Holland Van Gijzen Lawyers and Notaries LLP;Angela Peters-Derksen of Ernst & Young Actuarissen B.V.; Remco Bleijs, Hanny Kemna and Jan Niewold of Ernst & YoungAccountants LLP; Alexandra Polman-Cros and Stephan van Rhee of Ernst & Young LLP’s Center for Business Knowledge –Business & Market Intelligence

Belgium: Yves Bernaerts, Bart Buelens, Wout Coppens, Mina Goldfays, Koen Marsoul, Noémie Niesten, Herman Schepers,Peter Telders and Nicole Verheyen of Ernst & Young Belgium; Audrey Favre and Luc Pomerleau of Ernst & Young France

Luxembourg: Bernd Henninger, Olivier Lambert, Sylvie Leick, Andre Pesch, Maria Scherer, Pierre Weimerskirch and YannickZeipen of Ernst & Young Luxembourg

Ireland: Donal O’Sullivan, Claire Ryan, Jim Ryan and Rav Vithaldas of Ernst & Young Ireland

United Kingdom: Matthew de Ferrars of Pinsent Masons; Michael Alkis, Jeffrey Calvert, Lynne Ed, Peter O’Neill, RiccardoTognettini, Philip Wheeler and Sally Whenman of Ernst & Young UK

Appendix A: Participants


Pension plan 1: Unconditional indexed career average planFor each year of service, the plan member earns a deferred benefit equal to € 500 (2009 level, annual increases of 2.5%);Accrued benefits and pensions in payment are unconditionally indexed based on 2% inflation.

Inception: (a total of 500 identical employees are in service)

Number of employees 500Age on joining organization 30Age of employee at December 31, 2008 40Gender MaleNormal retirement age 65Accrued benefit at December 31, 2008 € 5,000Mortality tables Pensioentafel 2006 (see Appendix)Age correction 0Percentage married 100%Withdrawal 1% a yearDisability 0.5% a yearPercentage of employees which will make use of value transfer 0%

There is no risk sharing between IORP, plan members and plan sponsor. Hence, all risks stay in the IORP. The plan sponsor isnot required to make additional contributions. In the event the IORP does not meet its funding requirements, benefits willbe cut.

For valuation purposes, the demographic evolution of plan members is projected using mortality assumptions employed forDB pension plans in The Netherlands (“Pensioentafel 2006” with no age adjustments). This mortality table allows for afuture increase of life expectancy (as a trend).

We have assumed a generic asset allocation for the IORP in Belgium, Ireland, Luxembourg, the Netherlands and the UK. • The portfolio is 40% in equities and 60% in fixed income securities;• The fixed income portion consists solely of government bonds;• The duration of the fixed income bonds is 5 years.

Appendix B: Assumptions for the calculation of required assets


Ernst & Young Financial Services Organization

Taxation

prof. dr. Ton DanielsPartnerErnst & Young Belastingadviseurs [email protected]+31 (0) 88-4071253

Lucas Woltring Jr ConsultantErnst & Young Belastingadviseurs [email protected]+ 31 (0) 88-4070883

Legal Framework and Ring Fencing

Nicolette Opdam PartnerHolland Van Gijzen Lawyers and Notaries LLP [email protected]+ 31 (0) 88-4070428

Bianca van TilburgConsultant LegalHolland Van Gijzen Lawyers and Notaries LLP [email protected]+ 31 (0) 88-4070431

Solvency Rules

drs. Angela Peters-Derksen AAGSenior ManagerErnst & Young Actuarissen [email protected]+ 31 (0) 30-2592207

Investment Principles

drs. Remco Bleijs RA DirectorErnst & Young Accountants LLP [email protected]+ 31 (0) 70-3286417

Information Required

drs. Jan Niewold RAPartnerErnst & Young Accountants LLP [email protected]+ 31 (0) 38-4561794

drs. Hanny Kemna RE PartnerErnst & Young [email protected]+ 31 (0) 88-4071785

drs. Michael VisserJr ConsultantErnst & Young Belastingadviseurs [email protected]+31 (0)40 260 2229

Ernst & Young Center for Business Knowledge – Business & Market Intelligence

drs. Alexandra Polman-CrosSr Business AnalystErnst & Young [email protected]+ 31 (0) 88-4071911

drs. Stephan van RheeSr Business AnalystErnst & Young [email protected]+ 31 (0) 10-4065260

Ernst & Young Marketing & Communications

Femke Tijmstra Program ManagerErnst & Young [email protected]+ 31 (0) 88-4070996

Contact persons

Ernst & Young

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to bea substitute for detailed research or the exercise of professionaljudgment. Neither EYGM Limited nor any other member of theglobal Ernst & Young organization can accept any responsibility forloss occasioned to any person acting or refraining from action as aresult of any material in this publication. On any specific matter,reference should be made to the appropriate advisor.

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