Opportunities in ‘Europe’

Hans van Meerten, pension lawyer at Clifford Chance, gave an overview of developments in European legislation.

Commissioner of the European Union Michel Barnier (responsible for Internal Market) released a proposal for a new Pension Directive (Directive 2003/41/EG) as part of a broad initiative to stimulate economic growth and long term investments.

Dutch pension funds are in the scope of the directive. The proposal sets forth measures to strenthen the governance and transparency of pension funds along the lines of the directive applicable to insurance companies: Solvency 2. The proposal doesn’t change the prudential (financial) requirements for pensioen funds. 

Topics of the proposal are:

• Assuring financial soundness of the pensions provider and more protection of plan participants;
• Better communication to pension plan plan participants;
• Removing barriers to work internationally as a pensions provider;
• Supporting pension funds to make long terms investments in growth, environment and economic activities conducive to a better environment.

As to pension fund investment policy the proposal states:

• The Prudent Person Principle will be amended tot he wording of the principle as applicable to investment funds (MiFiR legislation);
• EU member states may no longer impose additional requirements on foreign pension providers;
• EU member states may not impose restrictions on pension providers investing in long term financial instruments not traded on regulated markets. Moreover, member states are not allowed to impose restrictions on investments in non-listed capital goods connected with low greenhouse gas emissions and infrastructure projects conducive to climate;
• EU member states will require from national pension providers to organise the risk management, internal audit and, if applicable, actuarial functions of their activities.

Opportunities: bord crossing pension providers

The proposal states that EU member states must co-operate to enable pension providers to work internationally, regardless of local social and employment law and regardless of whether or not a pension is mandatory for employer and employees.

Hans van Meerten noted that social and national pension legislation will fall in the scope of European legislation whereas social and pension law were expressly exempt for falling within the reach of the EU.

The proposed legislation seems to offer an opportunity for pension funds and asset managers to jointly set up cross border pensio vehicles in the large EU market.

Pension funds and VAT

Ate van IJlzinga Veenstra, taks lawyer at Clifford Chance, gave a presentation about the financial burden (costs) of  Value Added Taks to pension funds.

Pension funds are exempt from VAT. This means that they do not levy a VAT charge on the services they render, and they cannot deduct any VAT charged tot hem either. Just like a consumer buying a pair of jeans on which sale VAT applies, a pension funds buying goods or services is left with the VAT bill. Given the billions of euros pensions funds outsource to investment management firms who must charge VAT, VAT is a vast part of the annual costs incurred by pension funds, along with the VAT charged by other service providers such as information and communication technology services.

There is, however, an exemption if pension funds and investment management firms provide their services together on a not-for-profit basis. This is similar to hospitals that work together to achieve a joint discount on goods or services they buy, and are exempt from VAT.

If pension funds are to carry out defined contribution plans rather than defined benefit plans, they will be regarded as a financial institution and, tax wise, treated accordingly, meaning they might not be exempt from VAT forever. An escape might bet he criteria as laid down in the EU Justice Court Decision of 12 december 2013, C-464/12 ATP Pension Service, where it was ruled that collective investment management services are exempt from VAT.

If pension funds are able to structure their investment management activities as collective investment management, they might be able to save 21% VAT on the management fee charged by an asset management firm, saving millions of euros a year. For this to happen, pension funds would need to work together in a formal legal legal entity, jointly carrying out their investment management activities, saving millions of euros that can be reserved for their plan members.