The chocolate connection

Last Tuesday saw an interesting convention on the shores of lake Geneva at the sumptuous estate of Baron Rothschild and his company. The topic of the well attended conference was pan-European pensions in general and the Belgian incarnation thereof in particular. The list of speakers could not have been of higher calibre: The Prime Minister together with two cabinet ministers and high level representatives of the EU Commission and the Belgian pensions supervisor. Their objective was to introduce the Belgian legal framework for the newly created legal entity Organisation for Financing Pensions (OFP). They did this quite effectively, albeit on the only neutral territory in Europe where the Pensions Directive is not applicable.

The OFP seems to be a highly attractive entity to provide pan-European pensions with. It operates on zero (income, capital, VAT) tax, it can provide solidarity across several pension plans (which is attractive for efficient capital allocation), it reflects no other restrictions on asset management than the Directive's prudent person principle, it may rely on Belgium's extensive network of double taxation treaties, it takes advantages of Belgium's recent transition to EET, it is not encumbered by a Pensions Protection Fund levy and last, but by no means least, the valuation of its liabilities may be based on a discount rate that incorporates expected returns, thus may go as high as 6%. A word of caution may be in order here, though: It is not clear whether the long term consensus expected return used to derive that attractive discount rate takes into consideration recent literature on the proper calculation of expected rates of return.

Jean-Pierre Steiner of Nestlé Capital Advisers shed some cold water on participants' hopes that pan-European pension plans might fully replace local plans in the near future. In his view, this is an ambitious long-term objective reaching beyond his active lifetime. Nevertheless, he put Nestlé's considerable weight behind the support of Belgium as the currently most attractive location for pan-European pension funds.

Also of interest was Mr Van Hulle, the EU Commission's representative's comment that he wasn't opposed to supervisory shopping, which is of course tantamount to regulatory shopping - something that tends to be frowned upon elsewhere. Equally interesting to Swiss listeners was Mr Wymeersch's note that Belgian first pillar institutions may be falling under the Directive, which seems to be in direct contradiction to the Directive's scope and is of particular interest to Liechtenstein as well.

Esse est percipi

McKinsey Strategy has a good piece on why accounting shouldn't drive strategy, exemplified with pensions accounting. While I fully agree with that statement, I think it's quite idealistic to the point of being utopian. It would be utopian to expect of preparers that they wouldn't use the possibilities they have to look as good as they possibly can. A mild form of such behaviour would be just presentational, i.e. immaterial, but as we know, accounting often drives transactions without any real economic motivation.

The only way out of this quandary is to devise financial reporting standards that make sense economically, i.e. under which you can only look good if you behave rationally economically. This is the purpose of the CFA Institute's Comprehensive Business Reporting Model with its thrust for full fair value accounting. That's when accounting comes full circle with enlightenment philosopher George Berkeley: Being is perceiving and being perceived.

Financial Analysts on Pensions

The January/February issue of the CFA Institute's Financial Analysts Journal is fully dedicated to pensions and retirement provision from an asset management perspective. Essential reading for all subscribers to this blog!

Liechtenstein attracts IORPs

IPE has an interesting story about German insurance LV 1871 bringing its pan-European pension fund to Liechtenstein. Other institutions are also confirmed to be interested in this location, which is entirely in line with our assessment of Liechtenstein as one of the competitive locations for European IORPs.

M&A Yearbook Switzerland

KPMG has published the first edition of its M&A Yearbook 2006 which contains an overview of mergers & acquisitions in Switzerland in 2006.