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In this Watson Wyatt Update:
In 1774, Abraham van Ketwich (1743-1809), a broker from Amsterdam, launched one of the world’s first asset pools. In this respect, pooling funds for investment purposes (assets) is not purely a 21st-century phenomenon. Nevertheless, the topic now tops the agenda of pension funds and multinationals. The enactment of a European pension directive in 2003 (Directive 2003/41/EC), which enabled cross-border pension schemes, and recent rulings by the European Court of Justice lie behind the increased interest in asset pooling.
What is Asset Pooling?
In asset pooling, several investors, with separately managed investment portfolios, combine their assets in a single investment pool. The aim is to obtain economies of scale, achieved by establishing a fiscally transparent investment vehicle. The best-known examples are the Irish Common Contractual Fund (CCF) and the Luxembourg Fonds Commune de Placement (FCP). It is also possible to set up a Fonds voor Gemene Rekening (FGR) in the Netherlands. When deemed fiscally transparent, the FGR is not liable for corporation tax. An FGR can be more interesting than the CCF or FCP as it – in contrast to the CCF and FCP – is not regulated and because the Netherlands’ extensive network of treaties helps to avoid double taxation. Specific circumstances are decisive criteria in determining the form to choose.
What are the advantages of Asset Pooling?
Asset managers have used asset pooling for quite some time, but the strategy is also advantageous for pension funds, insurers and multinationals. One key advantage is in the area of savings. Economies of scale make it possible to save on organisational and asset management costs (e.g. through reduced management, custody and administration fees, as well as through income from securities lending). Another advantage of asset pooling is the more efficient central-level organisation and risk management. Pooling lowers the ‘governance budget’, enabling multinationals to manage all local pension funds more efficiently. At the same time, small pension funds in particular are able to gain access to more specialised investment funds and strategies and are consequently able to generate higher yields or more effectively spread risks.
What comes next?
When implementing an asset pool, a pension fund or multinational must contend with a variety of tax-related, legal, organisational and investment-related considerations, including:
As a result of asset pooling, the local manager/ pension fund manager loses control of the investments made. However, the manager does not lose responsibility for the local pension fund as a whole (including accrued benefits, etc.). This contrasts with the establishment of a European pension fund, in which locally accrued benefits and assets are pooled in a single central pension fund.
Watson Wyatt monitors the developments in the field of asset pooling at the European level. For pension funds, insurers and multinationals, the primary motivation for using asset pooling is not so much the combination of investments, but rather the implementation of a fiscally transparent vehicle that transcends European borders.
For more information contact: Arjan-Tim Ferweda or Marijke Biewinga.
Following on from the District Court of Maastricht (see the July 2005 Brans Brief), the Den Bosch Court of Appeal has now also ruled that the use of a breadwinner’s offset does not result in unequal treatment and is thus permissible.
The court found that the individualised old-age pension of an employee’s partner, both in the case of a single-income and a double-income household, is due to the partner of the married employee and does not form part of the actual pension result to be realised by the employee. This is the case regardless of whether the employee is the breadwinner or double-earner; the individual pension result is thus not unequal through application of the breadwinner’s offset.
In the eyes of the court, the fact that the application of a breadwinner’s offset results in a double-earner situation in which both partners can be impacted does not represent an inconsistency with the principle of equal pay. According to the court, the latter in fact only ensures the equal pay of individual employees, not the equal pay of double-income household compared to single-income households.
With this unequivocal decision, the decisions taken by the Equal Treatment Commission (Commissie gelijke behandeling) in 2004 and 2005 were once again overruled. Though the Dutch Supreme Court has yet to pass judgment on the matter, it seems safe to say that use of the breadwinner’s offset is permissible.
For more information contact: Daniëlle van Veen.
Discount rates in many of the countries Watson Wyatt surveyed in its forthcoming 2007 Global Survey of Accounting Assumptions for Defined Benefit Plans have increased between the end of 2005 and 2006. Preliminary findings show average discount rates increased by 30 to 60 basis points across the Euro Zone, by 20 points in the United States and the United Kingdom and by 30 to 50 basis points in Scandinavia.
The discount rate is one of three key economic assumptions used to determine pension costs and obligations as required by accounting standards. The others are the expected rate of return on plan assets and the rate of plan participants’ salary increases.
The preliminary findings suggest that the expected rate of return assumptions used also increased – albeit only slightly – in most countries, further reducing pension expense. Rates of salary increases tend to be very specific to companies and plans and are thus harder to compare from year to year.
While these trends have worked to control liabilities, pension assets have also grown. Watson Wyatt’s Global Pension Assets Study found that institutional retirement fund assets in the world’s 11 major markets have more than doubled during the past ten years and now total USD 23.2 trillion. However, the growth of pension liabilities continues to exceed the growth of assets.
Participation in this survey is completely confidential, and no specific company data is provided. Regardless of survey participation, Watson Wyatt is pleased to offer this benchmarking survey free of charge.
For more information contact: Nathan Jackman.
The latest edition of Watson Wyatt’s Benefits Report Europe is now available. The 2007 edition contains the most recent changes in the area of ‘Employee Benefits’, with corresponding legislation and tax regulations for 32 countries within Europe. The Benefits Report Europe provides comprehensive directives concerning pensions and other fringe benefits. The report addresses the current situation and possible future changes, both according to country and to Europe as a whole. The international section covers issues such as EU law and legislation and worldwide benefits, including the drafting of international business plans, investments, social security and international reporting.
The Employment Terms & Conditions Report Europe contains the most recent developments regarding legislation for individual and collective labour relations. The report offers an overview of the various terms and conditions of employment (non-competition clause, part timers, trial periods, working hours, etc.) for European countries.
Both reports can be requested by e-mail (hcg info@watsonwyatt.nl) or by telephone.
For more information contact: Charonne Min.
Pension fund investment portfolios have become undeniably far more complex in recent years. As a consequence, it is becoming increasingly important to continuously measure, evaluate and communicate clearly with respect to investments and liabilities.
For this reason, Watson Wyatt has developed a clear and well-organised report structure. Our Watches are arranged in modules and focus on such aspects as liabilities (LiabilityWatch), investments (AssetWatch), yield development (PerformanceWatch) and asset managers (ManagerWatch).
For more information about Monitoring, go to www.monitoring-services.nl to view excerpts from sample reports.
For more information contact: Karin Kramer.
If you have any questions or remarks concerning this issue of the Watson Wyatt Update, please let us know.
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