In addition to pension funds and insurance companies, a new type of pension administrator has now been introduced into Dutch law: the premium pension institution (premiepensioeninstelling, "PPI"). The PPI qualifies as an institution for the occupational retirement provision under the European IORP Directive further discussed below. For various market participants in the financial services industry and especially those that have expertise in handling large administrations and have (access to) insurance product and fund offerings, such as (groups of) insurance companies and fund managers, the PPI may offer interesting opportunities for entering the expanding market for the (cross-border) pooling of defined contribution pension schemes ("DC pension schemes"). The legislation regulating the PPI comes into force on 1 January 2011.
We are ready!
Building on its extensive experience with advising clients in the investment management industry, and in particular with assisting clients in setting up investment structures for pension funds, life insurers and investment funds, our Investment Management Group is ideally positioned to advise on the establishment of a PPI. We can provide a full, one-stop service including
- on the various possibilities for structuring a PPI and providing the necessary notarial services
- advice on a PPI’s governance
- advice with respect to a PPI’s business (such as contracts with other parties involved with the administration of the DC pension scheme and the investment of the pension assets
- drafting of all required documentation for the licence application process
- advice on tax aspects with respect to the PPI.
2. Background of the introduction of the PPI in the Netherlands
The introduction of the PPI forms the first phase in the three phase development of a system for administration (and pooling) of pension schemes. Because of this, the Netherlands, building on its vast expertise in the area of pension scheme administration and investment, will be able to compete more effectively with other European countries, using the possibilities offered by the Directive on Institutions for Occupational Retirement Provision ("IORP Directive"). The aim is to position the Netherlands as the country of choice for the establishment of institutions which can administrate pension schemes on a cross-border basis under the IORP Directive. The three phases are the introduction of the:
(2) multi-company pension fund. New legislation, which came into force on 11 June 2010, has created the possibility for two or more company pension funds (each attached to a particular company or group of companies) to merge and thus enables (smaller) company pension funds to achieve cost-savings and economies of scale. In reality, the development of the multi-company pension fund is independent from the development that has started with the introduction of the PPI and that is scheduled to be completed with the third phase. The multi-company pension fund has been a very welcome step for a large number of (smaller) pension funds that are finding it increasingly difficult to cope with, among other things, the burden of governance rules and regulatory restrictions affecting Dutch pension funds.
(3) general pension institution (algemene pensioeninstelling, "API"). In contrast to the PPI, as will be further explained below, the API will be able to (also) administrate cross-border defined benefit pension schemes.
3. The characteristics of a PPI
A PPI is able to administrate several (cross-border) DC pension schemes
A PPI may only administrate DC pension schemes in which the premium contribution is set but the amount of the final pension benefit is not. A PPI is able to administrate DC pension schemes for several different (groups of) companies (i.e. there is no delineation) and may ringfence the different schemes’ assets.
A PPI is not allowed to bear any risk
Different from pension funds and insurance companies, a PPI may not bear any risks linked to death, disability or longevity ("biometrical risks"). A PPI may also not itself guarantee returns on investments of the premium contributions or guarantee the amount of the pension benefit.
A PPI is only involved in the accrual phase of the pension under Dutch pension schemes
Insofar as Dutch (DC pension) schemes are concerned (under which the pension benefit must consist of a life-long payment to the pensioner), a PPI is only able to operate during the accrual phase of the pension. A life-long payment of pension benefits to pensioners entails longevity risk which a PPI is not allowed to bear. During the accrual phase, a PPI receives the premium contributions from the employer and invests these monies in accordance with the prudent person rule. In addition, a PPI performs the administration and communication with the scheme participants. As soon as a scheme participant retires, the PPI must transfer the corresponding invested assets to a pension administrator which is allowed to bear risks (such as a life insurer). The life insurer will then operate in the pay-out phase of the pension and pay out the pension benefit. Of course, for non-Dutch pension schemes that provide for a periodic benefit payment or a lump sum payment (instead of an obligatory life-long payment) a PPI can actually operate in the pay-out phase.
Usually, Dutch DC pension schemes contain disability and surviving relatives’ pension elements. A PPI not being allowed to bear biometrical risks means that the employer must have an insurance contract in place with an insurance company to administrate those elements of the scheme from the outset of the accrual phase. A PPI, under its licence from the Dutch Central Bank ("DCB"), is allowed to act as an intermediary between the employer and an insurance company. In addition, it is possible to attribute a central role to a PPI with respect to the entire DC pension scheme product offering and have the PPI carry out certain administration tasks for the insurance company by way of outsourcing.
4. Regulatory framework applicable to a PPI
A PPI is subject to parts of the Financial Markets Supervision Act (Wet op het financieel toezicht; "FMSA") and to parts of the Pension Act (Pensioenwet). The regulatory framework applicable to a PPI is a mixture of provisions applicable to life insurers that administrate pension schemes, investment funds and pension funds. Below we have indicated the most important requirements applicable to a PPI.
Licence and cross-border activities
A PPI must obtain a licence from the DCB before it can perform its services. The licence can serve as a "European passport" enabling the PPI to provide cross-border services within the European Economic Area after having been given DCB approval.
Legal entity and governance of the PPI
A PPI must be a legal entity. The governance of a PPI is not influenced by (representatives of) employers and employees. A PPI is only required to have:
- at least two daily policymakers who operate from the Netherlands; and
- an internal supervisory body (audit committee or supervisory board).
Sound business operations
A PPI must comply with several requirements regarding controlled and sound business operations. This means, among other things, that a PPI must establish a compliance function. A PPI must also ensure a systematic analysis of the integrity risks and provide for several procedures to safeguard the integrity of its business operations.
Prudential requirements applicable to a PPI
As a PPI is not allowed to bear any risks, a PPI is only subject to a minimum capital (own funds) requirement of EUR 225,000.
Prudent person rule – prohibition on providing loans and guarantees
A PPI must invest the premium contributions in accordance with the prudent person rule and in accordance with a number of principles. For example, a PPI must invest the assets in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. The FMSA also provides that it is in principle prohibited for a PPI to provide any loans or guarantees to third parties.
Provision of information
A PPI must provide obligatory information to the pensioners and the pension beneficiaries, such as a uniform pension overview. A PPI must also provide certain information to the pensioners and the pension beneficiaries at their request. If a pensioner has assumed responsibility for any investments, the PPI must provide advice regarding the spread of the investments in relation to the duration of the period up to the retirement date so as to continue to reduce the investment risk closer to the retirement date.
5. Contractual arrangements of a PPI
The following figure sets out the most important contractual arrangements relevant to a PPI.
Please click here to view the diagram.
There is a three party relationship between an employee, employer and PPI. Employee and employer (or their representatives) conclude a pension agreement. The employer enters into an administration agreement with a PPI for the administration of the pension agreement (consisting of a DC pension scheme). The relationship between the PPI and the employees is embedded in the pension scheme.
Contractual arrangements with respect to the insurance company (number 4)
As a PPI is not allowed to bear any risk, all biometrical risks must be borne by a pension administrator which is allowed to bear such risks, such as an insurance company. This means that the employer must insure all risk elements of the pension scheme with one or more insurance companies. In our view, at least two contractual arrangements can be made for this purpose. First, a PPI could act as an intermediary between the employer and the insurance company(ies) for the conclusion of the insurance against biometrical risks. Second, it must be arranged that a PPI is obliged to transfer the pension assets to the insurance company upon retirement because the insurance company must be in the position to administrate the benefit pay-out phase of the pension. Such an arrangement could, for example, be provided for in a three party administration agreement between the employer, the PPI and the insurance company.
Contractual arrangements regarding the pension custodian (number 5)
A PPI is only obliged to establish a pension custodian if the PPI has an investment policy which could lead to a real risk that the pension assets and the capital of the PPI will be insufficient for paying the claims of the PPI with respect to the management of the pension scheme and the custody of the pension assets and the claims of the pensioners and pension beneficiaries. A PPI may also voluntarily establish a pension custodian, for example, to separate the several pension schemes it administrates (ringfencing). The PPI may only transfer the ownership of the pension assets to a pension custodian after the conclusion of an agreement of management and custody that complies with the requirements under the FMSA.
Outsourcing agreements (number 6)
A PPI may outsource parts of its activities, such as the management of its investments, the pension administration and the communication with the pensioners. Of course, the outsourcing of the activities must be in accordance with the outsourcing rules under the FMSA and the Pension Act. This means, among other things, that a PPI must ensure that the outsourcee complies with the rules under the Pension Act and the FMSA to which the PPI is subject. Also, the outsourcing agreement must be drawn up in writing and must, for example, set out how the agreement can be terminated and how it is guaranteed that the PPI can, upon such termination, perform the activities itself or have them performed by another third party.
6. Tax aspects of a PPI
A PPI is, under certain conditions, subject to a favourable tax regime. A PPI is exempt from Dutch corporate income tax and is entitled to a tax rebate for Dutch dividend tax withheld from the dividends distributed to the PPI. With respect to investments outside the Netherlands, the PPI may claim the advantages of the Dutch tax treaty network. Pursuant to these tax treaties, a lower foreign tax on dividend and interest may apply to the PPI.
Premium contributions paid by a Dutch employer in connection with a pension scheme administrated by a PPI are tax deductable. The same principle applies to premium contributions paid by a Dutch employer to a pension fund.
If a pensioner is employed by a Dutch employer that is subject to wage withholding tax, the “exempt-exempt” taxation system or EET system applies. Under this system, pension claims are not part of the taxable wage and the wage withholding tax only becomes due once the pension is paid out.
Certain provisions in the tax legislation are still to be amended with respect to the introduction of the PPI.