Pension Funds

To fund its pension promises, an employer might wish to establish a distinct legal entity rather than relying on group insurance or an internal regime (with provision made on the liability side of the balance sheet).

Luxembourg offers companies three types of structure that are suited to multinational companies with expatriate staff. The "CAA pension fund" is under the prudential regulation of the insurance commission, the Commissariat aux Assurances (CAA), while the financial centre supervisory authority, the Commission de surveillance du secteur financier (CSSF) regulates the Variable Capital Pension Savings Company (SEPCAV) and the Pensions Savings Association (ASSEP) regimes.

Each of these structures must be approved by its respective regulator. In conformity with the EU Pension Directive’s principle of mutual recognition of occupational retirement schemes, a Luxembourg pension fund can operate anywhere in the European Union as long as it is approved by the relevant Luxembourg regulator.

While the prudential supervision of such schemes is the responsibility of the regulator in its country of establishment, the applicable social legislation is that of the country in which it operates, that is, where the company for which it will manage the retirement scheme is based.

As legal entities, both the SEPCAV and the ASSEP can be used to fund death and disability payments as well as retirement plans.

The SEPCAV is a company structure where the beneficiaries are the shareholders. It has a variable capital structure (similar to the SICAV investment fund) and its shareholders are limited to a pre-defined group of people. When a participant retires, the SEPCAV distributes the capital value of the shares purchased by the member’s subscription payments. A SEPCAV is thus only appropriate for defined contribution schemes.

An ASSEP, on the other hand, is structured as an association the object of which is to guarantee the payment of a pension. It undertakes to pay a regular pension or a lump sum of capital to its members who are the fund’s creditors. The ASSEP is more suitable for defined benefit schemes but can also be used for defined contribution schemes or a mixture of the two within the same legal entity (by adopting an umbrella structure). When an ASSEP is used for death and invalidity payments, appropriate financial reserves must be provided for or else risks must be reinsured.