Belgium, Prime Location for Pan-European Pension Funds - Invest in Belgium, increase your profits

 
Belgium, Prime Location for Pan-European Pension Funds - Invest in Belgium, increase your profits
Belgium,

Prime Location

for Pan-European

Pension Funds

www.business.belgium.be

Invest in Belgium, increase your profits
Belgium, Prime Location for Pan-European Pension Funds - Invest in Belgium, increase your profits
Table of Contents

    Foreword

    1.     Introduction

    2.     Legal framework: Structure and organization of the OFP
    2.1    Separate legal entity
    2.2    Autonomous legal framework
    2.3    Simple and flexible structure
    2.4    Comply with host country social and labor legislation
    2.5    Creation of the OFP and authorization to act as a pension fund
    2.6    Conclusion

    3.     Financial framework
    3.1    Conditions of operation
    3.2    Qualitative rules as opposed to quantitative rules
    3.3    Technical provisions
    3.4    Coverage of the technical provisions
    3.5    Investments
    3.6    Financing plan
    3.7    Statement of investment policy principles - SIP
    3.8    Balance sheet of the OFP: assets and liabilities
    3.9    Dynamics of the financing framework
    3.10   Asset management and custody
    3.11   Information to the pension plan participants and beneficiaries
    3.12   Supervision
    3.13   Conclusion

    4.     Tax regime
    4.1    Corporate income tax – “zero taxation on profit”
    4.2    International taxation: benefiting from double taxation treaties
    4.3    VAT
    4.4    Other indirect taxes
    4.5    Conclusion

    5.     Some data

    Contacts

2
Belgium, Prime Location for Pan-European Pension Funds - Invest in Belgium, increase your profits
The ageing of the population will boost the development of
                                       funded pension schemes, complementary to the statutory state
                                       pension.
                                           This theme will enlarge the pension fund market on an
                                       unprecedented scale. In the coming decades they will change
                                       from net asset accumulators to institutions paying out more
                                       than they are receiving.
                                           The recent turbulence on the global financial markets
                                       demonstrated the importance of pan-European pension funds.
                                       Pension promises have a more and more profound impact on
                                       corporate balance sheets of multinationals. The sharp decline
in the financial markets and falling interest rates has led to unexpected pension deficits and a growing
concern as to how to mitigate the volatility of coverage ratios.
   Pension funds get management attention with a strong demand for centralized risk management
and control of pension assets and liabilities. Pooling enables businesses to bundle assets and liabilities
from various jurisdictions under a single licensed Pension Fund.
   In line with the Single Market, recent European directives now allow cross-border pension funds to be
set up within the European Union. Today, Belgium is the only European country offering multinationals
a complete and comprehensive dedicated framework for establishing both pan-European and
international pension funds.
   Belgium has already facilitated the establishment of the pan-European pension funds. Pooling is
in practice not a big bang but a step-by-step approach leading to a fully operational pan-European
pension fund.
   This brochure sets out the benefits of this very effective and advantageous legal, fiscal and prudential
framework. It also points out the broad range of modern treaties for the avoidance of double taxation
which our country has concluded, thereby offering substantial savings with regard to the portfolio of
each fund.
   Our situation in the heart of Europe further strengthens our position on the pension fund market.
The European headquarters of many multinationals are already located in our country. It is therefore
to be expected that they should also set up their pan-European or international pension funds here.
   Belgium is positioning itself as a prime centre of shared services for international businesses and
the Belgian government is committed to facilitate an attractive and sustainable framework for long
term investors, such as pension funds.
   I trust that this brochure will be a useful document for the decision-makers in the pension and
business community.

                                            Yves Leterme
                                            Prime Minister

                                                                                                              3
Belgium, Prime Location for Pan-European Pension Funds - Invest in Belgium, increase your profits
1. Introduction
    1. Introduction                                                                           Furthermore, new
                                                                                              Furthermore,       new tax
                                                                                                                       tax provisions
                                                                                                                            provisions were
                                                                                                                                         were adopted
                                                                                                                                               adopted
                                                                                                                     44
                                                                                         on 27 December
                                                                                                 December 2006  2006 to      createaanew
                                                                                                                         to create      newfavourable
                                                                                                                                              favorable
                                                                                                                                          5 5
          Belgium recently         implemented
                          implemented            the the EUEU Directive                  tax regime
                                                                                             regime ininline
                                                                                                           linewith
                                                                                                                 withthetheEET-principle
                                                                                                                              EET-principle. Thanks  to
                                                                                                                                              . Thanks
               1
    2003/41 (the so-called
               1
                        so-calledIORPIORPDirective)
                                              Directive)bybyadopting
                                                                adopting a               these  provisions,
                                                                                         to these              a well-designed
                                                                                                        provisions,                pension fund
                                                                                                                        a well-designed           loca-
                                                                                                                                                pension
    a
    newnewandand      transparent
                 transparent            flexible
                                 flexible           legal framework,
                                           legal framework,         which                fundinlocated
                                                                                         ted    Belgium   in can
                                                                                                              Belgium
                                                                                                                  benefit can   benefit
                                                                                                                             from              a “zero”
                                                                                                                                        fromcorporate
                                                                                                                                  a “zero”
    which
    promotes promotes
                   Belgium Belgium
                              as as “theas “the
                                             prime prime   location”
                                                       location”       for
                                                                   for in-               corporate
                                                                                         income   tax.income tax.
    international
    ternational and    and  pan-European
                          pan-European            pension
                                              pension        funds.
                                                          funds.
          The
          The ActAct of
                     of 27
                         27 October
                            October 200620062 on
                                              2
                                                 on the
                                                    the supervision
                                                         supervision of of               2.     Legal framework : Structure and organization
    IORPs
    IORPs (Institutions
             (Institutions forfor Occupational
                                   Occupational Retirement
                                                      Retirement Pro-Pro-                2. Legal   framework - Structure
                                                                                            of the OFP
    vision)
    vision) defines the legal structure, the organization
              defines    the  legal    structure,     the  organization                     and organization of the OFP
    and   the functioning
    and the    functioning of  of pension
                                   pension funds.
                                               funds.                                    2.1. Separate legal entity
          Moreover, the prudential legal framework
          Moreover, the prudential legal framework applies
                                                                                         2.1. Separate legal entity
                                                                                         A pension fund established in Belgium takes6 the le-
    applies the “prudent person”– principle and grants                                   A pension fund established in Belgium takes the
    the “prudent person”– principle and grants optimiza-                                 gal form of an OFP :
    optimization opportunities to the pension fund,                                      legal form of an OFP:
    tion opportunities to the pension fund, its sponsoring                               - Organization for Financing Pensions
    its sponsoring undertakings and the pension plan                                     - Organization for Financing Pensions
    undertakings and the pension plan participants. The                                  - Organisme voor de Financiering van Pensioenen
    participants. The Act offers a flexibility which allows                              - Organisme voor de Financiering van Pensioenen
    Act offers a flexibility which allows the pension fund to                            - Organisme de Financement de Pensions.
    the pension fund to best respond to the specific                                     - Organisme de Financement de Pensions.
    best respond to the specific needs and wishes of the
    needs and wishes of the multinational or group of
                                                                                         Autonomy.
                                                                                         Autonomy. The       OFP is a separate legal entity solely
                                                                                                         The OFP is a separate legal entity solely
    multinational or group of companies.
    companies.                                                                           liable   for its funds and obligations
                                                                                         liable for its funds and    obligations and
                                                                                                                                 and distinct
                                                                                                                                       distinct from
                                                                                                                                                from
                                                                                                                          7
          A pension
          A   pension fundfund located
                                  located in in Belgium
                                                  Belgium may  may have
                                                                     have                the
                                                                                         the sponsoring
                                                                                                sponsoring undertakings
                                                                                                             undertakings6..
    cross-border activities
    cross-border       activities and
                                    and operate        several pension
                                          operate several        pension                 It
                                                                                         It isisspecifically designed
                                                                                                  specifically        to allow
                                                                                                               designed        for a flexible
                                                                                                                          to allow            gover-
                                                                                                                                      for a flexible
    plans applicable
    plans    applicable to  to employees
                                employees workingworking in     different
                                                             in different                nance     structure  and organization.
                                                                                         governance structure and organization.
    countries (host countries). The pension fund will,
    however, solely be subject to the Belgian legal and                                  2.2. Autonomous
                                                                                         2.2. Autonomous legal   legal    framework
                                                                                                                       framework
    regulatory prudential framework. If the employees                                    Unique. Since
                                                                                         Unique.    Since the
                                                                                                            the OFP
                                                                                                                OFP is is a new legal entity, it is not
    affiliated to the pension fund are working in countries                                                  applicable to
                                                                                         subject to laws applicable        to other
                                                                                                                               otherlegal
                                                                                                                                      legalentities.
                                                                                                                                            entities.
    belonging to the European Economic Area (EEA), the                                   The ActAct ofof2727October
                                                                                                              October 20062006     is transparent
                                                                                                                               is transparent   and and
                                                                                                                                                      go-
    relevant legal
                 legalprovisions
                         provisions  3 3 of their country’s social
                                       of their country’s social and                     governs
                                                                                         verns   thethe   OFP’s
                                                                                                      OFP’s       structure
                                                                                                              structure    and and     organization
                                                                                                                                 organization         but
                                                                                                                                               but also
    and    labor    laws    must
    labour laws must be respected.   be   respected.
                                                The BelgianThe pruden-
                                                                 Belgian                 also  its activities  and  its functioning.
                                                                                         its activities and its functioning.
    prudential
    tial framework  framework
                          offers, on offers,
                                        the one on hand
                                                     the one     hand a
                                                           a guarantee                   The Act
                                                                                         The  Act isis available
                                                                                                        available in
                                                                                                                   in English,
                                                                                                                        English, French,     Dutch and
                                                                                                                                    French, Dutch    and
    guarantee        of   solid    management,
    of solid management securing the interests and pen-  securing     the                German      on  the  website     of  the   Belgian
                                                                                         German on the website of the Belgian competent Su-  competent
    interests     and  pension     rights  of   the  plan
    sion rights of the plan participants and, on the other  participants                 Supervision
                                                                                         pervision        Authorities,
                                                                                                      Authorities,   thetheCBFA FSMA    (www.fsma.be).
                                                                                                                                    (www.cbfa.be).   The
    and, on the other hand, provides a high degree of                                    The Act is implemented by Royal Decrees, which are
    hand, provides a high degree of flexibility in the level                             Act is implemented by Royal Decrees, which are also
    flexibility in the level of funding by sponsoring                                    also available on the FSMA-website. Furthermore,
    of funding by sponsoring undertakings. The justifica-                                available on the CBFA-website. Furthermore, the7
    undertakings. The justification “on a case by case”                                  the FSMA issues circulars and memoranda
    tion “on a case by case” basis relates to the “specific”                             CBFA issues circulars and memoranda8 commenting
    basis relates to the “specific” characteristics of the                               commenting on the practical implications of the
    characteristics of the pension plans and their partici-                              on the practical implications of the legislation.
    pension plans and their participants.                                                legislation.
    pants.
                                                                                         2.3. Simple and flexible structure
    1
    1 Directive
        Directive2003/41/EC
                  2003/41/ECofofthe
                                 theEuropean
                                     EuropeanParliament
                                              Parliament and
                                                         and of
                                                             of the
                                                                the Council on
                                                                    Council on           2.3. Simple and flexible structure
    the activitiesand
                   andsupervision
                       supervision
                                                                                         Governance.
                                                                                         Governance. InIn accordance
                                                                                                           accordancewith
                                                                                                                       withthethe OECD
                                                                                                                                 OECD    Guideli-
                                                                                                                                       Guidelines
    the activities                of of Institutions
                                     Institutions     for Occupational
                                                  for Occupational      Retirement
                                                                   Retirement Pro-                                             9
    Provision  (IORPs)
                                                                                         nes
                                                                                         for for pension
                                                                                              pension   fundfundgovernance
                                                                                                                 governance 8 , the governance
                                                                                                                             , the governance
    vision (IORPs)  of 3 of 3 June
                         June  2003.2007.
    2 Most provisions entered into force on 1 January                                    structure of
                                                                                         structure of the OFP ensures an appropriate
                                                                                                      the OFP   ensures  an  appropriate division
                                                                                                                                          division
    2 Most provisions entered into force on 1 January 2007.
    3 Mandatory legal provisions of the host countries (‘host country’ is the            of operational  responsibilities  as   well as oversight
                                                                                         of operational responsibilities as well as oversight
    3 Mandatory legal provisions of the host countries (‘host country’ is the
    country whose social and labor legislation applies to the relationship               and supervision responsibilities.
                                                                                                           responsibilities.
    country whose social and labour legislation applies to the relationship
    between the sponsoring undertaking and the plan participants), within the
    between the sponsoring undertaking and the plan participants), within the            6    The Act of 27 October 2006 provides for a transitional period of 5 years
    limits of EU/international law.
    limits of EU/international law.                                                      (until 1 January 2012) to the benefit of already existing pension funds which,
    4 Act of 27 December 2006 relating to diverse provisions.
    4 Act of 27 December 2006 relating to diverse provisions.                            pursuant to the previously applicable legislation, took the legal form of a non-
    5 EET: “exempt-exempt-taxation”: (E): tax exemption for the contributions
    5 EET : “exempt-exempt-taxation” : (E) : tax exemption for the contributions         profit association (vzw-asbl) or mutual fund (ovv-aam).
    paid into a pension fund for the accrual of pension benefits (tax relief for the     6 Hence, safeguarding the accrued pension benefits and entitlements of
    paid into a pension fund for the accrual of pension benefits (tax relief for the     7 Hence, safeguarding the accrued pension benefits and entitlements of the
    contributions paid by the sponsoring undertakings and by the pension plan            the pension plan participants against bankruptcy of their employer, the
    contributions paid by the sponsoring undertakings and by the pension plan            pension plan participants against bankruptcy of their employer, the sponso-
    participants); (E): tax exemption of income generated by the contributions,          sponsoring undertaking.
    participants)
    gains         ; (E)
           realized  by:the
                         tax pension
                              exemption  of income
                                      fund,         generated
                                            capital gains      bythe
                                                          during  theaccrual
                                                                      contributions,
                                                                             period      ring undertaking.
                                                                                         7 Also  available on the FSMA’s website, www.fsma.be.
    gains to
    prior realized by the pension
             the payment           fund, capital
                           of the benefit;       gains during
                                           (T): taxation of thethe accrualbenefits
                                                                 pension   period        8  Also available
                                                                                         8 OECD            on the
                                                                                                  guidelines  for CBFA’s
                                                                                                                  pensionwebsite, www.cbfa.be.adopted by the OECD
                                                                                                                          fund governance,
    prior to
    upon     the payment
          payment   of theof the benefit ; (T) : taxation of the pension benefits upon
                           benefits.                                                     9  OECDonguidelines
                                                                                         Council              for pension fund governance, adopted by the OECD
                                                                                                   28 April 2005.
    payment of the benefits.                                                             Council on 28 April 2005.
4
Consequently, the OFP must consist of at                 least
                                                     2 (at      2 bo-
                                                            least)  or    participants  and beneficiaries
                                                                          legislations applicable           in the management
                                                                                                    to the pension   plans whichofit
 dies : bodies:
more                                                                      their pension plans by the OFP.
                                                                          operates.
-a A general
     general assembly
                 assembly                                                      The creation,
                                                                                       creation,    composition,
                                                                                               composition,   powerspowers      and
                                                                                                                       and functio-
The sponsoring undertakings whose pension plans                           functioning
                                                                          ning          of these
                                                                                of the social      committee(s)
                                                                                              committee(s)         candecided
                                                                                                              can be    be decided
                                                                                                                              upon
are operated
      operated by   bythetheOFP
                              OFParearemembers
                                          membersofofthe  thegeneral
                                                               gene-      upon
                                                                          by theby  the parties
                                                                                  parties        involved.
                                                                                          involved.         No requirements
                                                                                                     No legal   legal requirements
                                                                                                                              other
assembly     9
               .  The
                   10    general    assembly     has
 ral assembly . The general assembly has the overall    the   overall     otherthe
                                                                          than   thanestablishment
                                                                                       the establishment    of a written
                                                                                                       of a written      document
                                                                                                                     document   are
supervision
 supervision and  and oversight       responsibility and
                         oversight responsibility      and may
                                                             may bebe     are imposed
                                                                          imposed        by Belgian
                                                                                     by Belgian  law. law.
granted    broad      powers    (to be   defined  in
 granted broad powers (to be defined in the bylaws ).the  bylaws   11).
                                                                   10

-- a
   A board
     board of of directors
                  directors                                                2.5. Creation
                                                                          2.5.   Creation ofof the
                                                                                               the OFP    and authorization
                                                                                                     OFP and  authorization to act as
The OFP must have at least one operational body:                                 a pension fund
 The OFP must have at least one operational body :                               to act as a pension fund
the board of directors. The latter defines the                             Adopt bylaws. The OFP can simply be created by
 the board of directors. The latter defines the general                   Adopt bylaws. The OFP can simply be created by
general policy of the OFP and is responsible for the                       adopting bylaws. One ordinary member-sponsoring
 policy of the OFP and is responsible for the operatio-                   adopting bylaws. One ordinary member-sponsoring
operational activities of the OFP.                                         undertaking suffices to that end. The bylaws do not
 nal activities of the OFP.                                               undertaking suffices to that end. The bylaws do not
- Other operational bodies (under the control of the                       need to be drafted by a notary nor do they require
 Contractual Freedom. The new legal framework is                          need to be drafted by a notary nor do they require
board of directors)                                                        court approval. The bylaws will be published in the
 based on the principles of flexibility and contractual                   court approval. The bylaws will be published in the
Contractual        Freedom. The new legal framework is                     Belgian State Gazette.
 freedom
based    on: the
             the parties      setting
                     principles         up the OFP
                                  of flexibility andcan    structure
                                                       contractual        Belgian
                                                                           Apply for Stateauthorization.
                                                                                            Gazette.          Prior to commencing
 it according
freedom:     theto     their own
                   parties          needs
                              setting       and
                                        up the   wishes
                                               OFP          provided
                                                     can structure        Apply     for  authorisation.    Prior
                                                                           its pension fund activities, the OFP   to commencing
                                                                                                                       must apply for its
 the basic  double       structure   is complied
it according to their own needs and wishes provided with.                 pension     fund  activities,  the OFP   must apply
                                                                           IORP-authorization from the Belgian (home country)   for  the
the basic double structure is complied with.                              IORP-authorization
                                                                           competent authority,     from
                                                                                                       thethe Belgian
                                                                                                           FSMA.   The(home
                                                                                                                       requestcountry)
                                                                                                                                 file to
 2.4. Comply with host country social                                     competent      authority,   the CBFA.  The request
                                                                           be submitted to that end can be downloaded to     file     be
                                                                                                                                   from
       and labour
2.4. Comply        with legislation
                           host country social and                        submitted
                                                                           the FSMA’stowebsite.
                                                                                            that end can be downloaded from the
 Respect
      labor oflegislation
                 local social regulation. One or more so-                 CBFA’s
                                                                           Amongst   website.
                                                                                        the most important documents to be
Respect      of local
 called social              socialmay
                    committees         regulation.
                                           be set up The      parties
                                                       to allow   the      remitted to
                                                                          Amongst      thethe FSMA
                                                                                            most       are: documents to be remit-
                                                                                                   important
involved    in    the     pension    plan    can
 OFP to meet the requirements of the host country’sset  up   one    or    -ted
                                                                             The  bylaws
                                                                                to the CBFA are :
more
 social committees          to enable the
         and labour legislations               OFP totomeet
                                          applicable              the
                                                           the pen-       - The
                                                                              the financing
                                                                                  bylaws plan
requirements          of  the
 sion plans which it operates.host   country’s   social   and   labor     -- The  statement    of investment policy principles (SIP),
                                                                              the financing plan
Employee involvement. Social committees will pro-                         -- Athe
                                                                                description
                                                                                  statementof  of the  pensionpolicy
                                                                                                  investment    plansprinciples
                                                                                                                       which the(SIP),
                                                                                                                                    OFP
ve useful to involve different groups of pension plan                        intends   to administer
                                                                          - a description of the pension plans which the OFP
9 Voting rights can be determined in the bylaws.
                                                                            intends to administer
10 Bylaws
10 Voting rights can be determined
           or certificate            in the(“statuten”
                          of incorporation  bylaws.    – “statuts”).
11 Bylaws or certificate of incorporation (“statuten” – “statuts”).
                                                                                                                                            5
12
    -- The
        the management
            management agreement
                         agreement11                                                     workers
                                                                                         workers in  in Belgium.
                                                                                                          Belgium. Hence,
                                                                                                                      Hence, a   multinational group
                                                                                                                              a multinational       group
        informationregarding
    - Information   regarding the
                               the sponsoring
                                   sponsoring undertakings
                                              undertakings                               without a company basis in Belgium may decide to
        and  the members
       and the members    of the operational bodies.
                                 operational bodies.                                     set up its pan-European or international pension
                                                                                         fund in Belgium.
                                                                                                   Belgium.
    The FSMA      decides upon the application within 3
          CBFA decides                                                                   Adequate liabilities
                                                                                         Adequate                   covered by appropriate
                                                                                                       liabilities covered        appropriate assets.
    months following remittance
                        remittance ofof the
                                         the complete
                                             completefile.
                                                      file.                              In respect of the pension plans which it is operating,
    If the
        theOFP
             OFPenvisages
                   envisages   engaging
                            engaging         in cross-border
                                       in cross-border    acti-                                OFPmust
                                                                                         the OFP      must      establish
                                                                                                             establish     an adequate
                                                                                                                       an adequate     amount amount    of
                                                                                                                                                 of liabi-
    activities within the EEA, the  notification procedure
    vities within the EEA, the notification procedure fo-13 12                           liabilities   (i.e.  technical  provisions)     corresponding
                                                                                         lities (i.e. technical provisions) corresponding to the
    foreseen
    reseen bybythe
                 theIORP
                     IORPDirective
                           Directivemust
                                     mustbe be complied
                                               complied with.
                                                         with.                           to the financial
                                                                                         financial   obligationsobligations  whichfrom
                                                                                                                     which result      result
                                                                                                                                            thefrom    the
                                                                                                                                                 pension
    This  notification can  be  introduced    simultaneously
    This notification can be introduced simultaneously                                   plans. These technical provisions must be covered be
                                                                                         pension    plans.     These  technical   provisions     must   by
    with  the authorization
    with the  authorization request.
                             request.                                                    covered    by  appropriate    assets
                                                                                         appropriate assets (cf. infra 3.3).   (cf. infra  3.3).
                                                                                         Global management/netting. Different
                                                                                         Global management/netting. Different
                                                                                                                                                 pension
                                                                                                                                          pension plans
    2.6. Conclusion                                                                      plans may be managed16 globally15. However, the
    2.6. Conclusion                                                                      may be managed globally . However, the OFP is free
    The legal framework sets forth simple principles for                                 OFP is free to decide differently and organize a
    The legal framework sets forth simple principles for                                 to decide differently and organize a ring-fencing on a
    the organization and the governance structure of the                                 ring-fencing on a voluntary basis between different
    the organization and the governance structure of the                                 voluntary basis between different pension plans.
    OFP and allows parties to adapt the organization and                                 pension plans.
    OFP and allows parties to adapt the organization and                                 Solidarity. The OFP can also determine itself the
    functioning to their specific situation.                                             Solidarity. The OFP can also determine itself the
    functioning to their specific situation.                                             degree of solidarity it wishes to apply amongst its
                                                                                         degree of solidarity it wishes to apply amongst its
                                                                                         sponsoring
                                                                                         sponsoring undertakings.
                                                                                                          undertakings. These
                                                                                                                           These rules
                                                                                                                                     rules need
                                                                                                                                             need toto be
                                                                                                                                                        be
    3. Financial
    3. Prudentialframework
                   framework                                                             laid  down in
                                                                                         laid down     in the
                                                                                                           the so-called
                                                                                                                so-called management
                                                                                                                           management agreement.
                                                                                                                                             agreement.
                                                                                         This
                                                                                         This agreement
                                                                                                 agreementisisconcluded
                                                                                                                     concludedbetween
                                                                                                                                   between the the
                                                                                                                                                OFP OFP
                                                                                                                                                      and
    3.1. Conditions
    3.1  Conditions ofofoperation
                         operation                                                       the  sponsoring      undertakings   and   defines
                                                                                         and the sponsoring undertakings and defines the     the rules  of
    When authorized by the FSMA  CBFA1413 the OFP may start                              the
                                                                                         rulesOFP’s    functioning.
                                                                                                  of the               The management
                                                                                                            OFP’s functioning.                agreement
                                                                                                                                    The management
    operating pension plans providing for retirement                                     may    allow compensation
                                                                                         agreement         may allow (“netting”)
                                                                                                                          compensation to be (“netting”)
                                                                                                                                               organized
    benefits15
            14
               .                                                                         without   prejudice to
                                                                                         to be organized           the relevant
                                                                                                                 without         applicable
                                                                                                                          prejudice     to thesocial  and
                                                                                                                                                 relevant
    No Belgian activity is required.
                                required. The Belgian law                                applicable
                                                                                         labour         social and
                                                                                                  legislations    andlabor legislations
                                                                                                                      provided             and provided
                                                                                                                                 the minimum       vested
    does not
          not require
                 requirethat
                          thatoneone  or more
                                   or more        sponsoring
                                             sponsoring    un-                           the minimum
                                                                                         rights   of the planvested  rights of and
                                                                                                                 participants   the plan    participants
                                                                                                                                      beneficiaries    are
    undertakings
    dertakings bebe    locatedininBelgium,
                     located       Belgium,nor
                                             northat
                                                 that at
                                                      at least                           and beneficiaries are safeguarded.
                                                                                         safeguarded.
    one
    one pension
        pension plan
                   plan which
                        which the
                                the OFP
                                    OFP operates
                                          operates applies  to
                                                   applies to
                                                                                         3.2 Qualitative
                                                                                         3.2.                 rules
                                                                                               Qualitative rules  asas  opposed
                                                                                                                     opposed
    12 IfIf any.
    11      any. The
                 The management
                     management agreement
                                agreement is
                                          is concluded
                                             concluded between
                                                       between the
                                                               the OFP
                                                                   OFP                         to quantitative    rules
                                                                                               to quantitative rules
    and its
    and its members
            members sponsoring
                    sponsoring undertakings,
                               undertakings, determining its terms
                                             determining its terms and
                                                                   and                   The    legal framework
                                                                                         The prudential   framework ofofthe   Belgian
                                                                                                                         the new        legislation
                                                                                                                                  Belgian  legisla-
    conditions of
    conditions of operation
                   operation and
                              andthe
                                   therules
                                        rulesof of
                                                its its
                                                     functioning. If these
                                                        functioning.       rulesrules
                                                                      If these    are    describes the rules which the OFP must respect in
                                                                                         tion describes the rules which the OFP must respect
    defined
    are     in the
        defined  in bylaws, the law
                     the bylaws, thedoes
                                     law not
                                         doesimpose  the conclusion
                                               not impose           of a mana-
                                                           the conclusion  of a          relation to the technical provisions, the investments
                                                                                         in relation to the technical provisions, the investments
    gement agreement.13
    management          Notify the intention to accept sponsorship from a
                agreement.                                                               and the management. The law sets qualitative rather
                                                                                         and the management. The law sets qualitative rather
    12
    sponsoring
       Notify theundertaking   established
                 intention to accept       in another
                                     sponsorship from EEA-member    state (host
                                                      a sponsoring undertaking           than quantitative rules, both for the determination of
                                                                                         than quantitative rules, both for the determination of
    established
    country). Theinnotification
                    another EEA-member    state (host
                                must be addressed      country).
                                                   to the home The  notification
                                                                 country’s com-          the technical provisions and for the investments.
                                                                                         the technical provisions and for the investments.
    must
    petentbe addressed(i.e.
           authorities  to the  home country’s
                            for Belgium : CBFA).competent authorities
                                                 The OFP may          (i.e. for
                                                              also engage    in
    Belgium: FSMA).
    cross-border      The OFP
                 activities      maythe
                            outside   also engage
                                        EEA.      in cross-border
                                             A simplified            activities
                                                          notification proce-            3.3 Technical provisions
    outside the EEA. A simplified notification procedure applies to that end.
                                                                                         3.3. Technical provisions
                                                                                         Cross-border      activities if “fully” funded. In the
    dure applies to that end.
    13
                                                                                         Cross-border    activities  if “fully” funded.
                                                                                         event of cross-border activities,       the IORP In the event
                                                                                                                                              Directive
    14 InIn the
             the event
                 event of
                       of cross-border
                           cross-border activities,
                                         activities, the
                                                     the OFP
                                                         OFP can start its
                                                             can start its activities
                                                                           activities
    after completing the cross-border activities notification procedure (i.e.            of cross-border   activities,  the IORP   Directive
                                                                                         requires that the technical provisions are fully     requires
    after completing the cross-border activities notification procedure (i.e.
    within 2 months for cross-border activities within the EEA following the             that theattechnical
                                                                                         funded      all timesprovisions
                                                                                                                 in respectare of fully funded
                                                                                                                                  the total      at all
                                                                                                                                              range  of
    within 2 months for cross-border activities within the EEA following the
    principal 3 months FSMA-review and authorization period).                            times  in respect   of the  total  range
                                                                                         pension plans operated by the pension fund.of pension   plans
    principal 3 months CBFA-review and authorization period).
    14 For non-Belgian pension plans (i.e. pension plans not applicable to               operated
                                                                                         Prudent butby the  pension
                                                                                                        dynamic       fund. funding requirement.
                                                                                                                   “fully”
    15 For non-Belgian pension plans (i.e. pension plans not applicable to
    salaried and self-employed workers in Belgium), the Belgian legislation              Prudent   butlegislator
                                                                                         The Belgian    dynamic has “fully”  funding arequirement.
                                                                                                                         not adopted      quantitative
    salaried and self-employed workers in Belgium), the Belgian legislation
    does not impose any restrictions or conditions for the content of the                approach
                                                                                         The  Belgianinlegislator
                                                                                                         this respect
                                                                                                                   has notbutadopted
                                                                                                                                requires   a prudent
                                                                                                                                        a quantitative
    does not impose any restrictions or conditions for the content of the pen-
    pension plans. Indeed, if the pension plan can be considered in the host             calculation    method,     based     on   economical
                                                                                         approach in this respect but requires a prudent calcu-    and
    sion plans. Indeed, if the pension plan can be considered in the host EEA-
    EEA-member state as a pension plan within the meaning of the IORP                    lation method, based on economical and actuarial as-
    member state as a pension plan within the meaning of the IORP Directive
    Directive (for non EEA-member states : the same definition of retirement             15 The Act only imposes as exceptions to this rule: the separate
    (for non EEA-member states : the same definition of retirement benefits              16 The Act only imposes as exceptions to this rule : the separate mana-
    benefits as the one used in the Directive), the OFP is authorized to operate         management of pension plans applicable to salaried workers and of
    as For
    it. the one   usedplans
              pension   in theapplicable
                               Directive), to
                                           thesalaried
                                               OFP is authorized  to operate
                                                        workers and           it. For
                                                                     self-employed       gement
                                                                                         pension ofplans
                                                                                                    pension plans applicable
                                                                                                         applicable          to salariedworkers
                                                                                                                    to self-employed     workersand
                                                                                                                                                  and of
                                                                                                                                                      thepension
                                                                                                                                                           separate
    pension plans
    persons       applicable
            working          to salaried
                    in Belgium,           workers
                                 a different        and of
                                             definition self-employed   persons
                                                           “retirement benefits”         plans applicable
                                                                                         management    of to self-employed
                                                                                                          pension          workers
                                                                                                                   plans which are and the separate
                                                                                                                                   subject          manage-
                                                                                                                                           to recovery measures
    working
    is        in to
       retained  Belgium,   a different definition
                    better correspond              of “retirement
                                        to the Belgian  situation. benefits” is retai-   ment of pension
                                                                                         decided         plans
                                                                                                 upon by the   which are subject to recovery measures decided
                                                                                                             FSMA.
    ned to better correspond to the Belgian situation.                                   upon by the CBFA.
6
sumptionsassumptions
actuarial      which the OFP        needsthe
                                  which      to be
                                                OFP able   to justify
                                                        needs         .
                                                                   to be      (SIP)  and inmay
                                                                              Derivates     accordance
                                                                                                 be usedwith     the assumptions
                                                                                                            provided                 used to
                                                                                                                       they contribute     in
Coherent.
able          The. OFP must establish, as technical provi-
       to justify                                                             the  financing
                                                                              reducing    the plan.
                                                                                               investment risks or facilitate efficient
sions,   an  amount
Coherent. The OFP         sufficient
                                must toestablish,
                                          guaranteeas    thetechnical
                                                                pension       Derivates    may   be used The
                                                                              portfolio management.         provided   they contribute
                                                                                                                  key message              to
                                                                                                                                   is again:
benefits already
provisions,              in payment
                  an amount               and the to
                                      sufficient      accrued
                                                           guaranteepen-      reducing
                                                                              if you canthe    investment
                                                                                            justify           risksuse
                                                                                                     a different     or facilitate  efficient
                                                                                                                         of derivatives    as
the
sion pension
       benefits benefits
                   in accordance already
                                       withina payment         and the
                                                prudent valuation             reasonable
                                                                              portfolio     and prudentThe
                                                                                          management.      , considering   all elements,
                                                                                                                 key message                it
                                                                                                                                is again : if
accrued
method. The  pension       benefits
                   calculation     basisinofaccordance
                                              the technicalwith   provi-a     will can
                                                                              you   in principle
                                                                                        justify a be allowed.
                                                                                                  different  use of derivatives as reaso-
prudent
sions must  valuation
                form part   method.      The calculation
                               of the financing      plan which    basis
                                                                     the      nable and prudent, considering all elements, it will in
of
OFP theandtechnical      provisions
            the sponsoring              must form
                                   undertakings          partupon.
                                                     agree        of the      principle be allowed.
financing     plan which
DC. For defined                 the OFP
                       contribution          and the
                                         pension    plans,sponsoring
                                                               the pro-       3.6 Financing plan
undertakings        agree    upon.
visions to accrue are equal to the sum of the vested                          The Financing
                                                                              3.6.   OFP must  planestablish a financing plan in
DC.   For defined
pension    rights ascontribution
                         defined by the  pension    plans,
                                             plan rules    and thebypro-
                                                                     the      agreement
                                                                              The   OFP mustwithestablish
                                                                                                 all sponsoring   undertakings
                                                                                                          a financing            which
                                                                                                                        plan in agree-
visions to accrue are equal to the sum of the vested                          commit themselves to execute it and to pay the
host countries’ social and labour legislation, if any.                        ment with all sponsoring undertakings which commit
pension rights as defined by the plan rules and by                            contributions pursuant thereto.
DB. In respect of pension plans providing for defined                         themselves to execute it and to pay the contributions
the host countries’ social and labor legislation, if any.                     The financing plan determines the calculation
benefits, for a guaranteed return or for biometrical                          pursuant thereto.
DB. In   respect of pension plans providing for defined                       method of the contributions to be paid per pension
risks17, the calculation method of the technical pro-                         The financing plan determines the calculation
benefits, for a guaranteed return or for biometrical                          plan to ensure appropriate funding of the pension
visions may take into account prudent interest rates                          method of the contributions to be paid per pension
risks16, the calculation method of the technical                              liabilities and of the solvency margin, as well as to
which may e.g. consider expected investment returns.                          plan to ensure appropriate funding of the pension
provisions may take into account prudent interest                             cover all costs and expenses. It must be submitted
Flexible.
rates which Themay OFPe.g. mayconsider
                                  define its   own rules
                                            expected           and cal-
                                                          investment          liabilities
                                                                              to the FSMA.and of the solvency margin, as well as to
culation method provided they may be justified by
returns.                                                                      cover
                                                                              OFPs all    costs and
                                                                                        which        expenses.(as
                                                                                                themselves      It must  be submitted
                                                                                                                    opposed    to the
the specifics
Flexible.     TheofOFP the OFPmay and     the its
                                     define    pension
                                                    own rulesplans and
                                                                     ad-      to the CBFA.undertakings) undertake to guarantee
                                                                              sponsoring
ministered.      The   OFP     thus  disposes     of
calculation method provided they may be justified by  a  high    degree       OFPs   which themselves
                                                                              the pension               (aswell
                                                                                             obligation as  opposed  to thewhich
                                                                                                                 as OFPs    sponsoring
                                                                                                                                 cover
of flexibility
the  specifics  , subject
                   of the OFPonly to  a reasonable
                                    and   the pensionjustification
                                                            plans ad-         undertakings)
                                                                              biometrical risksundertake   to guarantee
                                                                                                  must establish           the pension
                                                                                                                    a solvency  margin
basis.
ministered.      The OFP thus disposes of a high degree                       obligation
                                                                              (defined byas   wellDecree).
                                                                                            Royal  as OFPs which cover biometrical
Minimum
of flexibility=,vested
                  subjectpension
                             only to rights.    The technical
                                      a reasonable                  pro-
                                                         justification        risks must establish a solvency margin (defined by
basis.
visions may not, however, be lower than the so-cal-                           Royal Decree).
Minimum
led minimum    = vested
                    vested pension         rights.
                               pension rights     18 The technical
                                                     defined by the           3.7 Statement of investment policy principles – SIP.
provisions
plan rules and, mayif not,      however,
                        applicable,           be lower
                                       the host    country’s  than   the
                                                                  social      The OFP
                                                                              3.7.      must of
                                                                                   Statement  establish   a written
                                                                                                  investment  policystatement
                                                                                                                      principles of  in-
                                                                                                                                 - SIP
so-called    minimum         vested   pension     rights
and labour legislation. Provided this minimum is res-      defined    by      vestment   policy  principles –  SIP  –  describing
                                                                              The OFP must establish a written statement of in-     the
the  planthe
pected,     rules
                lawand,
                      allows if applicable,
                                a long-termthe   viewhost    country’s
                                                        in respect    of      investmentpolicy
                                                                              vestment     risk principles
                                                                                                 measurement– SIPmethods,     the risk
                                                                                                                    - describing    the
social   and   labor    legislation.
the calculation method to be applied.   Provided     this   minimum           management     processes   and  the strategic
                                                                              investment risk measurement methods, the risk  asset   al-
is respected, the law allows a long-term view in                              location, considering    the nature  and   the
                                                                              management processes and the strategic asset al-duration
respect of the calculation method to be applied.                              of the pension liabilities. The OFP must review this
3.4. Coverage of the technical provisions                                     location, considering the nature and the duration of
                                                                              statement at least every 3 years.
Prudent Investments. The technical provisions must                            the pension liabilities. The OFP must review this sta-
3.4 Coverage of the technical provisions
be covered by assets invested according to the “pru-                          tement at least every 3 years.
Prudent Investments. The technical provisions
dent person” principle.
must be covered by assets invested according to the
The only quantitative restriction which applies and
“prudent person” principle.
which is imposed by the IORP Directive relates to in-
The only quantitative restriction which applies and
vestments
which          in the sponsoring
          is imposed         by the undertakings
                                        IORP Directive      (limited  to
                                                                 relates
5 %investments
to    of the portfolio   in asthe
                                a whole)    or in theundertakings
                                     sponsoring          group (limi-
ted  to  10 %   of  the   portfolio   as  a
(limited to 5 % of the portfolio as a whole)whole)    of  sponsoring
                                                               or in the
undertakings.
group (limited to 10 % of the portfolio as a whole) of
sponsoring undertakings.
3.5. Investments
Prudent and Consistent. Assets are to be invested
3.5    Investments
prudently,       in line with the investment policy as defi-
Prudent        and
ned in the statement  Consistent.      Assets are
                                 of investment          to beprinciples
                                                     policy     invested
prudently, in line with the investment policy as defined
17 Risks linked to death, disability and longevity
in  the statement of investment policy principles (SIP)
18 The minimum vested pension rights of the pension plan participants
and in accordance with the assumptions used in the
as determinedplan
financing        by the and
                        applicable host country test
                              a continuity      social that
                                                       and labour legisla-
                                                             proves     the
solvability
tion, if any. Forof the IORP
                 pension          in the long
                          plans applicable        run.workers in Belgium,
                                           to salaried

these
16    arelinked
   Risks   determined  on disability
                to death, the basisand
                                     of alongevity
                                          maximum 6 % discount rate and

mortality tables MR/FR.
                                                                                                                                                 7
Balance sheet of the OFP : assets and liabilities

    Assets                                                                    Liabilities
    General rules                                                             Technical provisions17 :
    • In line with the prudent person principle                               • Amount has to be sufficient to guarantee the pensions already
    • Valued at market value                                                     in payment and the accrued pension rights
    • Ensure the security, the quality, the liquidity and the profitability   • In line with a prudent actuarial valuation
    • Only quantitative restriction: max 5 % in sponsoring under-             • No quantitative rules but prudent choice of the economical and
       taking (max 10 % for a group)                                             actuarial assumptions i.e. :
                                                                                 • Discount rate has to be chosen taking into account :
    Investments for the coverage of the technical provisions :                      a)The return of the investments covering the technical
    • Invested in the best interest of the plan participants and plan               provisions and the future investment returns and/or
       beneficiaries                                                                b)The market yields of the bonds of a Member State or other
    • In line with the nature and the duration of the expected future               high-quality bonds ;
       retirement benefits                                                       • Biometric tables (life expectancy/mortality, disability)
    • Invested mainly on regulated markets                                          adjusted to the plan participants and beneficiaries
    • Investments in derivative instruments if compliant with                 • The method and the assumptions remain in principle
       prudential objective or if justified otherwise                            unchanged from one financial year to another
    • Properly diversified                                                    • The chosen method and the assumptions have to safeguard
                                                                                 the sustainability of the commitments
                                                                              • May not be lower than the minimum vested rights defined by
                                                                                 social and labor law
                                                                              “Solvency margin” (if needed - see 3.6) :
                                                                              • for the coverage of the death and disability benefits (biometrical risks)
    Other investments                                                         • based on quantitative rules (may be reduced by using
    • Flexibility (except 5 % in sponsoring undertaking, 10% in group)           (re)insurance of the risk coverage)
    • Alternative for the coverage of the so-called “solvency margin”:
       guaranteed claim on the employer

                                                                              Balance

    3.8
    3.8. Balance sheet of
         Balance sheet of the
                          the OFP
                              OFP:: assets
                                    assets and
                                           and liabilities
                                               liabilities                    The pension
                                                                              The  pensionplans
                                                                                             plansand
                                                                                                    andtheir  participants
                                                                                                          their            areare
                                                                                                                participants  a given and
                                                                                                                                  a given
    Summarized under the form of a balance sheet,                             are the key drivers for the investments, the determination
    Summarized under the form of a balance sheet, these                       and are the key drivers for the investments, the deter-
    these main principles apply in relation to the assets                     of the technical provisions and the funding.
    main principles apply in relation to the assets and their                 mination of the technical provisions and the funding.
    and their investments as well as to the liabilities.
    investments as well as to the liabilities.
                                                                              Scheme 1. Prudent management model
    3.9 Dynamics of the financing framework
    3.9. Dynamics of the prudential financing
    The main goal of the Belgian prudential framework is
         framework
    the creation of a prudent and coherent management                                                      Investments
    The  main  goal ofthe
    model in which      theinvestments
                            Belgian prudential       framework
                                            are in harmony        is
                                                               with                                         (Asset Mix)
    the creation of a prudent
    the characteristics    of the and   coherent
                                   pension    plansmanagement
                                                      and the plan
    model  in  which   the investments      are
    participants and in which the investments    in harmony
                                                        matchwith
                                                                the
    the characteristics    of the  pension    plans
    underlying technical provisions. This model grantsand the plan
    participantsinand
    autonomy        theinmanagement
                           which the investments        match are
                                             policies, which    the                                       Pension Plan
                                                                                                               &
    underlying
    to be prudenttechnical    provisions.
                      and solid  . Moreover,  Thisthis
                                                    model   grants
                                                       framework                                          participants
    autonomy
    allows      in the management
            for significant               policies,
                              flexibility in the levelwhich  are to
                                                        of funding
    insofar  as the
    be prudent    andtechnical   provisionsthis
                        solid. Moreover,       areframework
                                                    fully covered.
                                                                 al-
    lows for significant flexibility in the level of funding                                                                 Technical provision
                                                                                      Funding                                        +
    Explanatory      comments
    insofar as the technical         on Scheme
                                 provisions           1: covered.
                                               are fully                                                                     “Solvency margin”
    • The characteristics of the pension plans and
    their  participants
    Explanatory    comments  highly    influence
                                 on Scheme      1 : the funding
    and  the  investments       and  determine
    • The characteristics of the pension plans      the technical
                                                         and their
    provisions.
    participants highly influence the funding and the in-
    vestments and determine the technical provisions.                                        Key is : prudence and coherence
8
Average expected return over 10 years
The choice
The    choiceofofthe  thedemographic
                           demographic    assumptions
                                             assumptions (e.g.(e.g.
                                                                life
expectancy/mortality,
life expectancy/mortality,     retirement
                                   retirementage…)
                                                 age…)must  be be
                                                         must     in                    12
line  with  the  characteristics      of the pension
in line with the characteristics of the pension plans  plans   and
theirtheir
and     participants.
             participants.                                                              10
•  The pension
• The    pension plans
                    plans and their participants influence

                                                                          %
the investments.                                                                         8
•  To simplify,
• To  simplify, itit is
                     is advisable
                         advisable to invest in a conservative

                                                                          R E T U R N
                                                                                         6
way
way if the average remaining
      if the average      remaining duration
                                        duration of
                                                  of the
                                                     the pension
                                                         pension
“liabilities”  is  short    and  vice
“liabilities” is short and vice versa. versa.
                                                                                         4
The
The use useofofALM  ALM      (Asset
                        (Asset         Liability
                                Liability         Management)
                                           Management)      tech-
techniques      allows     aligning   the  investment
niques allows aligning the investment strategy with      strategy                        2
with the characteristics of the pension plan and the                                              0 % equities         25 % equities         75 % equities
the characteristics of the pension plan and the popu-                                             100 % bonds           75 % bonds            25 % bonds
population (i.e. “duration”).
lation (i.e. “duration”).
• The investments influence the technical provisions.
• The investments influence the technical provisions.
The discount rate for the calculation of the technical                                       Probability intervals
The discount rate for the calculation of the technical
provisions can be determined taking into account                                                  5-25 %             25-50 %           50-75 %         75-95 %
provisions can be determined taking into account the
the return of the underlying investments.
return of the underlying investments.
                                                                                    Scheme 3. Example of expected long-term return on the basis of
This return may be set e.g. by reference to the
                                                                                                          20
 This return
following      may be approach:
            simplified    set e.g. by reference to the fol-                         ALM techniques18

-lowing  simplified
   The returns  which approach     :
                         were achieved    in the past
-- the returns  which    were   achieved
   The expected long-term consensus        in the past
                                                   return (see                      •Global
                                                                                    •
                                                                                      Globalimpact
                                                                                               impacton   onthe
                                                                                                              thefunding.
                                                                                                                   funding.
 - the expected
example          long-term
           in Scheme           consensus
                         2); this           return
                                   model must   be (see  exam-
                                                    adjusted to                     The Belgian
                                                                                           Belgianlegislation
                                                                                                       legislationoffers   a high
                                                                                                                       offers       degree
                                                                                                                               a high        of flexi-
                                                                                                                                          degree    of
 ple in
the     Scheme
     asset        2) ; the
            mix and    thisrelevant
                             model must    be adjusted
                                     financial  markets.to the                      bility in setting
                                                                                    flexibility          the target
                                                                                                 in setting           funding
                                                                                                              the target        level,
                                                                                                                           funding     provided
                                                                                                                                     level,       the
                                                                                                                                            provided
Aasset
    moremixsophisticated
            and the relevant     financial
                             approach      markets.
                                         consists   of defining                     technical
                                                                                    the technicalprovisions    are covered.
                                                                                                       provisions             The OFP
                                                                                                                     are covered.     Themay
                                                                                                                                           OFPconsi-
                                                                                                                                                 may
the  return
 A more      on the basis
         sophisticated        of the expected
                          approach    consists return   pattern
                                                in defining the                     consider
                                                                                    der         creating
                                                                                         creating           a cushion
                                                                                                     a cushion           forabsorbing
                                                                                                                  for e.g.   e.g. absorbing   short-
                                                                                                                                         short-term
generated    by an
 return on the     ALMofstudy
                basis             (see example
                            the expected   returnin pattern
                                                    Schemege-3).                    term return
                                                                                    return           volatility.
                                                                                             volatility.
 nerated by an ALM study (see example in Scheme 3).                                 •AA pension
                                                                                    •    pension fund
                                                                                                    fund with
                                                                                                           with an average remaining duration
                                                                                    of 15  years    may   consider
                                                                                    of 15 years may consider that     that aa decrease
                                                                                                                              decrease // increase
                                                                                                                                            increase
                                                                                    of 11%%
                                                                                    of          in the
                                                                                            in the         expected
                                                                                                     expected    returnreturn    andin thus
                                                                                                                          and thus            in the
                                                                                                                                        the discount
 Scheme 2. Example expected long-term consensus return                              discount     rate   results   respectively    in  roughly
                                                                                    rate results respectively in roughly 15 % higher/lower      15 %
                                                                                    higher/lower
                                                                                    provisions.       provisions.
          LT consensus expected return on equities
                  (e.g. 4.5 % + 2.5 % = 7 %)                                        3.10 Asset management and custody
                                                                                    3.10 Asset management and custody
                                                                                    The OFP may freely appoint investment managers
                                                                                    The OFP may freely appoint investment managers for
            LT consensus equity risk premium (e.g. 2.5 %)                           for the management of its portfolio.
                                                                                    the management of its portfolio.
                                                                                    The OFP may also appoint a custodian established
                                                                                    The OFP may also appoint a custodian established
                                                                                    and authorized in any EEA member state.
LT consensus expected return on fixed income investment                             and authorized in any EEA member state.
               (e.g. 2.0 % + 2.5 % = 4.5 %)
                                                                                    As regards the underlying assets covering the
                                                                                    As  regards
                                                                                    technical    the underlying
                                                                                               provisions,       assetslegislation
                                                                                                           the Belgian    covering the  tech-
                                                                                                                                   requires,
                                                                                    nical  provisions,
                                                                                    as a rule,         the be
                                                                                                that they  Belgian  legislation
                                                                                                              deposited   withinrequires,
                                                                                                                                 the EEA.as  If
               LT consensus real growth (e.g. 2.5 %)                                a rule, that they be  deposited within  the EEA. If not,be
                                                                                                                                             a
                                                                                    not, a certificate of an authorized institution must
                                                                                    certificate
                                                                                    provided toofjustify
                                                                                                   an authorized  institution must be provi-
                                                                                                         non-EEA-deposits.
                      LT consensus inflation                                        ded to justify non-EEA-deposits.
                            (e.g. 2.0 %)

                                                                                    3.11 Information to the pension plan participants
 Example of above-mentioned consensus model :                                             and beneficiaries
 Asset mix : 0 % equities and 100 % bonds                                           The Belgian legislation fully complies with the infor-
 • expected LT return = 4.5%
                                                                                    mation obligations of the IORP Directive. It thus aims
 Asset mix : 25 % equities and 75 % bonds
 • expected LT return = 25% x 7.0 % + 75% x 4.5 % = 5.125%                          at creating more transparency.
                                                                                    17 For defined contribution pension plans, the provisions to accrue equal to
 Asset mix : 75 % equities and 25 % bonds
                                                                                    19
                                                                                    the For
                                                                                        sumdefined   contribution
                                                                                             of the social vested pension
                                                                                                                  reserves.plans, the provisions to accrue equal
 • expected LT return = 75% x 7.0 % + 25% x 4.5 % = 6.375%
                                                                                    to
                                                                                    18the
                                                                                       Thissum of theissocial
                                                                                            scheme             vested reserves.
                                                                                                        only illustrative and results from underlying economical
 The model to be used can be freely determined by the OFP in agreement
 with the sponsoring undertakings, provided it meets the prudent person             20
                                                                                    andThis scheme
                                                                                       financial    is only illustrative and results from underlying economi-
                                                                                                 assumptions
 criterion.                                                                         cal and financial assumptions.
                                                                                                                                                                   9
The pension
     3.11          plan participants
            Information               receive
                         to the pension    planannually a                     is
                                                                              Thisderived  fromtax
                                                                                      special    notregime
                                                                                                      at arm’s   length that
                                                                                                              implies    transactions   and
                                                                                                                                the taxable
     benefitparticipants
             statement describing the situation of the OFP
                         and beneficiaries                                    which
                                                                              basis isoftothe
                                                                                     20     be considered    as taxable income.
                                                                                               OFP only encompasses           the following
     and detailing
     The   Belgian the     current level
                       legislation   fully of  financingwith
                                             complies      of their
                                                                the           items:     By  only engaging   in  at  arm’s  length
     accrued individual
     information           pension
                    obligations       entitlements.
                                  of the  IORP Directive. It thus                   transactions, the OFP can avoid the addition
     aims  at will
     The SIP   creating  more
                   also be  madetransparency.
                                    available to all plan partici-            • Abnormal or of   benevolent
                                                                                                    this type ofadvantages
                                                                                                                  income. received
     The
     pantspension     plan participants
            and beneficiaries                receive annually
                                 or their representatives     upon a          The wording “abnormal advantages” refers to the
     benefit   statement describing the situation of the
     their request.                                                           Belgian
                                                                              •          legal terminology
                                                                                Non-deductible      costs otherindicating    incomeinwhich
                                                                                                                   than reduction
     OFP
     Otherand    detailingcan
            information     thebecurrent    level aiming
                                    requested,     of financing   of
                                                          at provi-           isvalue
                                                                                  derived  from  not  at arm’s   length
                                                                                        and capital loss on shares       transactions.
     their accrued
     ding the  pensionindividual  pension entitlements.
                         plan participants    (and beneficiaries)                  But   duly respecting
                                                                              Under Belgian                the generally
                                                                                                tax law, certain             applicable
                                                                                                                     costs made   by the le-
     The   SIP   will  also  be   made
     with accurate information regarding   available
                                                 theirto  all plan
                                                        benefits.               fiscal  at arm’s  length  principle,   the
                                                                              gal entity are not fully tax deductible or areOFP  cannot
                                                                                                                                     avoid
                                                                                                                                         tax
     participants and beneficiaries or their representatives                             becoming     taxable  on   such  income.
                                                                              deductible, even if it concerns professional expenses.
     upon their request.
     3.12 Supervision                                                         Examples of such non deductible costs are : non-de-
     Other information can be requested, aiming at                            • Non-deductible expenses
     The CBFA oversees and supervises the OFP.                                ductible taxes, fines, non-deductible car expenses,
     providing the pension plan participants (and                             Under Belgian tax law, certain expenses made by the
     Within the CBFA, the specific division “Supervision of                   restaurant and representation costs, certain social
     beneficiaries) with accurate information regarding                       legal entity are not fully tax deductible whether or not
     supplementary pensions” is in charge of overseeing                       benefits granted to employees…
     their benefits.                                                          it concerns professional expenses. Examples of such
     the OFPs. This division consists of a high expertise le-                        The OFP should in principle be in a position
                                                                              non-deductible expenses are: non-deductible taxes,
     vel team of multilingual actuarial, legal, financial and
     3.12    Supervision                                                                              to avoid these costs.
                                                                              fines, non-deductible car expenses, restaurant and
     The FSMAexperts.
     economic     oversees The
                             anddivision is easily
                                   supervises    theaccessible
                                                      OFP.     and            representation costs, certain social benefits granted
     applies the
              an open   discussion   philosophy.                              • Secret commissions paid
     Within       FSMA,    the specific    division “Supervision              to employees…
     of supplementary pensions” is in charge of                               This part of      the taxable
                                                                                            Generally,       an basis   is formed
                                                                                                                 OFP does            by payments
                                                                                                                              not have
     3.13 Conclusion
     overseeing    the OFPs. This division consists of a                      for which the non-deductible
                                                                                                  tax reporting formalities
                                                                                                                        expenses    have   not been
     The Belgian
     high          prudential
           expertise   level team framework       sets qualitative
                                        of multilingual      actuarial,ru-    complied with. In other words : payments have been
     legal,   grants flexibility
     les andfinancial              in the investment
                        and economic                     strategy,
                                              experts. The             the
                                                                division      made
                                                                              • Secret butcommissions
                                                                                              beneficiariespaid   have not been identified to
     determination
     is               of theand
        easily accessible       technical
                                     appliesprovisions
                                                an open (by     e.g. ta-
                                                           discussion         the
                                                                              Thistax   authorities.
                                                                                     part   of the taxableSincebasis
                                                                                                                   this non-reporting      prevents
                                                                                                                        is formed by payments
     philosophy.
     king into account the expected investment return), the                   for which
                                                                              the            the proper
                                                                                    tax authorities        fromtax taxing
                                                                                                                    reporting
                                                                                                                            the formalities
                                                                                                                                  beneficiary,have
                                                                                                                                                 the
     funding and the involvement of the sponsoring under-                     not been
                                                                              grantor    is complied
                                                                                             sanctionedwith.        In other words: payments
                                                                                                              and taxed.
     3.13
     takingsConclusion
              as well as plan participants and beneficiaries,                 have This
                                                                                      been  taxmade      but beneficiaries
                                                                                                 can easily      be avoided by have        not been
                                                                                                                                   complying
     The   Belgian   prudential
     by using, for example,          framework
                                 social  committees. sets qualitative         identified      to   the   tax    authorities.    Since
                                                                                   with the tax legislation on reporting of salaries,     this  non-
     rules  and grants
     The qualitative     flexibility
                      rules    for theindetermination
                                          the investment      strategy,
                                                          of the    tech-     reporting prevents           the commissions.
                                                                                                    fees and      tax authorities from taxing
     the
     nical provisions do not impose stringent demandse.g.
          determination     of  the  technical     provisions    (by    on    the beneficiary, the grantor is sanctioned and taxed.
     taking  into account     the  expected      investment
     the sponsoring undertakings in respect of their fun-       return),              By complying
                                                                              Investments        : “zero”- with   the ordinary
                                                                                                               taxation.   The OFP reporting
                                                                                                                                       is not liable
     the funding and the involvement of the sponsoring
     ding and the level of assets to accrue within the OFP,
                                                                                  obligations for salaries, fees and commissions,
                                                                              to capital gains tax. Likewise, (Belgian and foreign) di-
     undertakings as well as plan participants and                                 an OFP can avoid becoming taxable on secret
     whereas the governance structure and compliance                          vidend income and interest income will not be taxed in
     beneficiaries, by using, for example, committees.                                                    commissions.
     with the prudent person rule guarantee a solid mana-                     the hands of the OFP.
     The qualitative rules for the determination of the
     gement securing the interests and pension rights of                      If Belgian withholding tax on income has been applied
     technical provisions do not impose prescriptive                          Investments: “zero”- taxation.
     the plan participants.                                                   upon payment of income to the OFP, this tax will be
     demands on the sponsoring undertakings in                                The OFP is not liable to capital gains tax. Likewise,
                                                                              credited against the corporation tax which may be
     respect of their funding and the level of assets to                      (Belgian and foreign) dividend income and interest
     4. Taxwithin
     accrue     regime the OFP, whereas the governance                        due
                                                                              income(cf. supra).    In those
                                                                                         is not taxed            cases,
                                                                                                            in the       onlyofthe
                                                                                                                     hands      thetax
                                                                                                                                     OFP.remainder
     4.1   Corporate   income
     structure and compliance      tax –with
                                           “zero-taxation
                                                the prudent person            which    has not
                                                                              If Belgian            been set off
                                                                                                withholding        taxwill
                                                                                                                        onbeincome
                                                                                                                                reimbursed.     This
                                                                                                                                         has been
           on benefits”
     rule guarantees a solid management securing the                          results   in  a  favourable      tax  treatment
                                                                              applied upon payment of income to the OFP, this taxwhere    “gross  in-
     OFPs areand
     interests   subject
                     pensionto Belgian
                                 rights ofcorporate      income tax.
                                              the plan participants.          come”     mostly
                                                                              is credited          becomes
                                                                                               against           “net income”.
                                                                                                          the corporation      tax which may be
     This does not, however, imply that an OFP will be                        The
                                                                              due (cf. supra) and any excessofcredit
                                                                                    new    income      tax   regime       the OFP    will certainly
                                                                                                                                 is reimbursable.
     4.
     taxedTax   regime
            as an  ordinary corporation. To the contrary, an                  lead      a higherinflexibility
                                                                              This toresults           a favorable and more    choices in respect
                                                                                                                         tax treatment        where
     OFP is taxed according to the special income tax re-                     of  investment
                                                                              “gross    income”    decisions.     Whereas “net
                                                                                                      mostly becomes         in theincome”
                                                                                                                                     past, Belgian
                                                                                                                                              .
     4.1
     gimeCorporate
            applicable toincome       tax – investments
                             open-ended        “zero-taxation  funds of       The newfunds
                                                                              pension       income      taxturned
                                                                                                    often     regimetoofUCITS-investments
                                                                                                                            the OFP provides toa
           on  profit”
     the UCITS-type . 21
                                                                              higher flexibility
                                                                              increase     the return   and of more     choices inand
                                                                                                                the investments         respect    of
                                                                                                                                            to avoid
     OFPs    are subject
     This special           to Belgian
                   tax regime     impliescorporate       income
                                             that the taxable         tax.
                                                                  basis  22

     This
     of thedoes   not, encompasses
            OFP only   however, imply       thethat   an OFP
                                                 following  itemswill: be
                                                                              21 E.g. BEVEK / SICAV commonly used in Belgium.
     taxed as an ordinary corporation. On the contrary,                       19 E.g. BEVEK / SICAV commonly used in Belgium.
     an  OFP is taxed    according benefits
                                        to the special    income tax          22  Theapplicable
                                                                              20 The  applicablecorporate
                                                                                                 corporatetax
                                                                                                           taxrate
                                                                                                               rateisis33.99
                                                                                                                        33.99%%  (i.e.
                                                                                                                              (i.e. 3333
                                                                                                                                       %%  increased
                                                                                                                                         increased   with
                                                                                                                                                   with 3%
     • Abnormal    or benevolent                    received
     regime   applicable    to  open-ended        investments
     The wording “abnormal or benevolent” refers to                funds
                                                                      the
                                                                              3 % crisis
                                                                              crisis     surcharge),
                                                                                     surcharge),     except
                                                                                                 except       forsecret
                                                                                                        for the   the secret commissions
                                                                                                                        commissions      paid which
                                                                                                                                    paid which       are
                                                                                                                                               are subject
     of the UCITS-type .   19                                                 subject  to a tax
                                                                              to a tax rate     rate%.of 309 %. The latter tax is deductible, whereas the
                                                                                            of 309
     Belgian legal terminology indicating income which
                                                                              ordinary corporate tax of 33.99 % is not.
10
taxes,  this will
 investment       no longerWhereas
              decisions.    be necessary
                                    in the since
                                           past, the OFP
                                                 Belgian                            report,
                                                                                    4.4 Other information
                                                                                                  indirect to    plan participants, reporting
                                                                                                              taxes
itself benefits
pension   fundsfrom   the
                  often   same to
                        turned favourable tax regime. to
                                  UCITS-investments                                 to
                                                                                    Thethe
                                                                                         OFP competent
                                                                                               itself is notauthorities,  etc.UCITS-taxes.
                                                                                                             subject to the     If fees for VAT-This
increase the return of the investments and to avoid                                 exempted     services   are  charged   by  a  Belgian
                                                                                    means that the OFP’s direct investments are tax-        service
4.2. International
taxes,   this is no longer taxation  : benefiting
                                   necessary         fromthe
                                                 since      double
                                                                OFP                 provider,
                                                                                    exempt25,the    exemption
                                                                                                 whereas   the OFPapplies
                                                                                                                      mayordinarily.
                                                                                                                            indirectly encounter
taxation
itself      treaties
       benefits     from the same favorable tax regime.                             these
                                                                                    If      taxes when
                                                                                       the service        it opts
                                                                                                    provider        for participation
                                                                                                               is located                in certain
                                                                                                                           outside Belgium,      the
Very extensive double taxation treaty network. Since                                investment question
                                                                                    preliminary   funds whichas toare
                                                                                                                    thesubject   to the
                                                                                                                        localization  oftax.
                                                                                                                                          their ser-
4.2   International
it is subject               taxation:
                 to corporate     income benefiting
                                            tax, an OFP   from
                                                             will, in               No subscription
                                                                                    vices               tax or stamp
                                                                                          for VAT-purposes      needs toduty
                                                                                                                           be taxes
                                                                                                                              lookedare    due
                                                                                                                                       into.    on a
                                                                                                                                             If fees
      double      taxation      treaties
general, be able to claim the benefits of the double                                Belgian    OFP.
                                                                                    for VAT-exempted services, as defined, are charged
Since
taxationit istreaties
                subject concluded
                          to corporate  by income
                                             Belgium. tax,Belgium
                                                            an OFP                  to the OFP by a service provider established in the
is,
has one of the most extensive double taxationdouble
    in general,    able   to claim  the  benefits   of  the   treaty                EU but outside Belgium, no VAT should, as a general
taxation     treaties    concluded      by  Belgium.
networks. This will result in a higher “net” dividend      Belgium                  4.5. Conclusion
                                                                                    rule, be due in the EU-member state where the ser-
has one of the most extensive double taxation treaty                                The OFP enjoys a favorable tax regime, both for
income of the Belgian OFP versus most other coun-                                   vice provider is established, nor would VAT be due in
networks. This will result in a higher “net” dividend                               direct and indirect taxes.
tries.                                                                              Belgium26.
income of the Belgian OFP in comparison to most                                     Provided the OFP avoids being taxed on non-deductible
This implies that, if the source state provides for the
other countries.                                                                    costs, and to the extent foreign investments are
application of a domestic tax at source, an OFP will                                4.4. Other indirect taxes
This implies that, if the source state provides for                                 well-chosen or well-structured, the OFP can aim at
in principle be able to claim treaty exemption or re-                               The OFP itself is not subject to the UCITS-taxes. This
the application of a domestic tax at source, an OFP                                 an overall “zero-taxation”.
duction of foreign withholding tax on dividends and                                 means that the OFP’s direct investments are tax-
will in principle be able to claim treaty exemption or                                     Thus,
                                                                                            27
                                                                                                  Belgium can boast of particularly
interest, provided
reduction     of foreign the  treaty conditions
                            withholding            are met. and
                                           tax on dividends                         exempt    , whereas
                                                                                    advantageous terms   thewhich
                                                                                                             OFP may   indirectly
                                                                                                                  are quite       encounter
                                                                                                                            unparalleled  in
Belgium provided
interest,    recently renewed
                         the treatyits  double taxation
                                      conditions    are met.treaty                  these taxes when    it opts
                                                                                                     other      for participation in certain
                                                                                                            EEA-countries.
                  23
with the USA
Belgium       renewed. TheitsBelgian
                                 doubleOFP   is explicitely
                                          taxation     treaty men-
                                                                with                investment funds subject to the tax.
tioned   in   the  treaty21 so that no local withholding tax
the USA in 2006 . The Belgian OFP is explicitly                                     No subscription tax or stamp duty taxes are due on a
will be due as
mentioned        on eligible
                      dividendsforof treaty
                                       US resident
                                               benefits companies
                                                           (subject                 Belgian
                                                                                    5. SomeOFP. data
if received
to  meetingbythe   a Belgian     OFP. However,
                       treaty conditions           this benefit of
                                              on ‘limitations      is
subject to treaty
benefits’)             conditions
               resulting    in zerowhich     imply “limitation
                                       US withholding        tax onof               4.5. Conclusion
                                                                                    On April    1st, 2011 there were six IORP from 3
dividends
benefits”. from US equity.                                                          countries
                                                                                    The         of theaEuropean
                                                                                         OFP enjoys      favourableEconomic      Area
                                                                                                                       tax regime,     active
                                                                                                                                    both       in
                                                                                                                                          for di-
                                                                                    Belgium.
                                                                                    rect and indirect taxes.
4.3
4.3. VAT
     VAT                                                                            On the same
                                                                                    Provided        dateavoids
                                                                                               the OFP     9 OPFs to located
                                                                                                                      be taxedinon
                                                                                                                                 Belgium    have
                                                                                                                                    non-deduc-
Exempt.
Exempt. The     TheVATVAT       exemption
                           exemption                applicable
                                            applicable       to the to mana-the     activities in 7 countries    within  the  European
                                                                                    tible costs, and to the extent foreign investments areUnion.
management
gement by UCITS        of UCITS
                            has been   has    been extended
                                           extended      to the manage-to the       The complete
                                                                                    well-chosen    or list  of the different
                                                                                                      well-structured,          Pan can
                                                                                                                           the OFP    European
                                                                                                                                          aim at
management
ment by OFPs.         of  OFPs.                                                     Pension   Funds   located
                                                                                    an overall “zero-taxation”. in Belgium    can  be consulted
Based
Based on   on case
               case law law ofof the
                                 the European
                                         European CourtCourt of of Justice,
                                                                    Justice,        on the Thus,
                                                                                            website  of the FSMA
                                                                                                  Belgium             (www.fsma.be).
                                                                                                              can boast   of particularly
the exempted “management” activities                             22
                                                                      should
the exempted “management” activities24 should en-                                      advantageous characteristics quite unparalleled
encompass:
compass :                                                                                         in other EEA-countries.
• The “financial management” of an OFP: services
• the “financial management” of an OFP : services
consisting of the management of the financial and
consisting of the management                     of the financial and
other assets of the OFP25            23
                                        , as well as
other assets of the OFP , as well as
• The “administrative management”: services of
• the “administrative management” : services of ad-
administrative management for the operation of
ministrative
the   OFP, to the   management
                          extent thatfor    theytheareoperation
                                                          specific to  of and
                                                                            the
OFP, to thefor
essential        extent
                      the that
                             OFPs, they    are establishment
                                        e.g.:  specific to and essen-  of the
annual report, information to plan ofparticipants,
tial  for   the   OFPs,      e.g. :  establishment             the annual
reporting to the competent authorities, etc. If fees                                21 Treaty of 27 November 2006
for VAT- exempted services are charged by a Belgian                                 22 For the definition of “management activities” falling within the scope of
24 Treaty of 27 November 2006 – still to be ratified.
service provider, the exemption applies ordinarily.                                 the VAT-exemption, guidance can be found in an extensive administrative
24 For the definition of “management activities” falling within the scope
If the service provider is located outside Belgium, the                             Circular (N° AOIF 22/2008 – ET 113.316) of June 17, 2008
of the VAT-exemption, guidance can be found in case law, including case
preliminary question as to the localization of their                                23 Asset management does not include actual financial depositary
law of the European Court of Justice (ECJ), as well as in comments dea-
services for VAT-purposes needs to be looked into.                                  activities on the securities by the OFP.
ling with the management of UCITS (although the latter cannot be trans-
If fees for VAT-exempted services, as defined, are                                  24 Since the nature of the services rendered needs to be examined
posed as such since the mission and activities of both entities, OFPs and
charged       to the OFP by a service provider established                          on a case-by-case basis, and since national legislations must also be
UCITS, differ). The notion “management” of the OFP is specific to VAT,              26 Since the nature of the services rendered needs to be examined on a
in the EU but outside Belgium, no VAT should, as a                                  considered in light of EU law to determine the localization of the service,
which is an rule,
general      autonomous
                     be due concept  of EU-law.
                                in the          Consequently,
                                           EU-member            definitions
                                                              state    where set    case-by-case
                                                                                    each contract basis,
                                                                                                  and feeand
                                                                                                           forsince national
                                                                                                               services       legislations
                                                                                                                        will require       must analysis.
                                                                                                                                     a separate also be consi-

the
forth service    provider
      for financial            is established,
                    law purposes                      nor
                                    may not necessarily  be would
                                                             decisive. VAT be       dered
                                                                                    25 As in light ofBelgium,
                                                                                           regards   EU law tothe
                                                                                                               determine the localization
                                                                                                                  yearly 0.01 % UCITS tax of the
                                                                                                                                              (forservice, each
                                                                                                                                                   shareclasses
due in Belgium .
25  Asset  management   24does not include actual financial depositary activities   contract
                                                                                    intended and fee for services
                                                                                             for professional     will require a separate analysis.
                                                                                                              investors).
on the securities by the OFP.                                                       27 As regards Belgium, the yearly 0.08 % or 0.01 % UCITS tax
                                                                                                                                                                   11
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