A recent AG opinion in the Dutch Supreme Court concerning the application of VAT exemption to management of defined benefit pension schemes reaches, somewhat surprisingly, the opposite conclusion to the UK Wheels case.
The advocate general (AG) to the Dutch Supreme Court (case ref. 15/00148) recently opined that the management of Dutch defined benefit (DB) pension schemes should be exempt from VAT.
At first glance, that decision appears difficult to reconcile with the CJEU’s conclusion in Wheels (Case C-424/11) that a UK DB pension scheme does not qualify as a special investment fund (SIF). This raises the question of whether there is anything in the AG’s approach to suggest there remains mileage in arguments that management of UK DB schemes can qualify for the SIF exemption.
In both Wheels and the subsequent ATP case (Case C-464/12), the CJEU’s approach, applying the principle of fiscal neutrality, was to ask whether the relevant schemes were sufficiently comparable to other SIFs, such as UCITS, so as to be in competition with them. In ATP, the CJEU identified the essential characteristics of a SIF as the pooling of assets of several beneficiaries, enabling the risk borne by those beneficiaries to be spread over a range of securities. The court concluded that pension schemes such as the Danish defined contribution (DC) schemes under consideration may constitute SIFs if: (1) they are funded by the persons to whom the retirement benefit is paid (even if the contributions are paid by the employer); (2) the funds are invested using a risk-spreading principle; and (3) the pension customers bear the investment risk.
In Wheels, the CJEU decided that the UK DB schemes in issue did not qualify as SIFs because, crucially, the members of the schemes did not bear the investment risk arising from management of the scheme; the pensions received by employees from such schemes were independent of the value of scheme’s assets and investment performance, being based on length of service and salary.
The AG to the Dutch Supreme Court followed the CJEU’s approach in asking whether the relevant Dutch DB schemes competed with UCITS, specifically addressing the criteria identified in ATP, including the criterion apparently fatal to the UK DB schemes in Wheels – that investment risk is borne by the pension customers. However, unlike in Wheels, the AG’s view was that the Dutch pension customers did bear investment risk under the DB schemes concerned, since, where the pension fund’s yield fell below forecast, they faced a possible loss of annual indexation of pension benefits or even a reduction to their pension benefits.
What could this mean for UK DB schemes?
The investment risks identified by the Dutch AG are not as obvious, and are less direct than, those faced by an investor in a typical UCITS (or indeed DC pension scheme), but would nevertheless appear to be real if, as a result of poor investment performance, scheme members may receive lower benefits. However, those investment risks are not risks which a member of a typical UK DB pension scheme faces whilst the scheme is ongoing.
So far as rights have accrued (e.g. due to a certain number of years’ service and salary), there is no scope for the trustees of a UK DB scheme to reduce benefits or to remove indexation (unless discretionary). Indeed, any investment risk faced by a UK DB scheme member is more indirect still; since employers are legally obliged to fund scheme deficits, the risk is that the fund falls into deficit (which may or may not be due to poor investment performance) and the employer becomes insolvent and unable to fund that deficit. Although in these circumstances the extent to which the members’ benefits can be provided will depend on the amount of the scheme funds and hence the investment return on them, this is perhaps too remote for members to be regarded as bearing any investment risk in the manner envisaged by either the CJEU or the Dutch AG.
Any decision of the Dutch Supreme Court which follows the AG’s opinion has no direct application in the UK, of course. In any event, the nature of current UK pensions regulation calls into question whether a similar conclusion could ever be reached in relation to a UK DB scheme. Any prospect of exemption would therefore appear to depend on whether ongoing litigation which seeks to argue for exemption of pension fund management as insurance rather than under the SIF exemption is ultimately successful.
Home >Articles > VAT and defined benefit schemes revisited?
VAT and defined benefit schemes revisited?
A recent AG opinion in the Dutch Supreme Court concerning the application of VAT exemption to management of defined benefit pension schemes reaches, somewhat surprisingly, the opposite conclusion to the UK Wheels case.
The advocate general (AG) to the Dutch Supreme Court (case ref. 15/00148) recently opined that the management of Dutch defined benefit (DB) pension schemes should be exempt from VAT.
At first glance, that decision appears difficult to reconcile with the CJEU’s conclusion in Wheels (Case C-424/11) that a UK DB pension scheme does not qualify as a special investment fund (SIF). This raises the question of whether there is anything in the AG’s approach to suggest there remains mileage in arguments that management of UK DB schemes can qualify for the SIF exemption.
In both Wheels and the subsequent ATP case (Case C-464/12), the CJEU’s approach, applying the principle of fiscal neutrality, was to ask whether the relevant schemes were sufficiently comparable to other SIFs, such as UCITS, so as to be in competition with them. In ATP, the CJEU identified the essential characteristics of a SIF as the pooling of assets of several beneficiaries, enabling the risk borne by those beneficiaries to be spread over a range of securities. The court concluded that pension schemes such as the Danish defined contribution (DC) schemes under consideration may constitute SIFs if: (1) they are funded by the persons to whom the retirement benefit is paid (even if the contributions are paid by the employer); (2) the funds are invested using a risk-spreading principle; and (3) the pension customers bear the investment risk.
In Wheels, the CJEU decided that the UK DB schemes in issue did not qualify as SIFs because, crucially, the members of the schemes did not bear the investment risk arising from management of the scheme; the pensions received by employees from such schemes were independent of the value of scheme’s assets and investment performance, being based on length of service and salary.
The AG to the Dutch Supreme Court followed the CJEU’s approach in asking whether the relevant Dutch DB schemes competed with UCITS, specifically addressing the criteria identified in ATP, including the criterion apparently fatal to the UK DB schemes in Wheels – that investment risk is borne by the pension customers. However, unlike in Wheels, the AG’s view was that the Dutch pension customers did bear investment risk under the DB schemes concerned, since, where the pension fund’s yield fell below forecast, they faced a possible loss of annual indexation of pension benefits or even a reduction to their pension benefits.
What could this mean for UK DB schemes?
The investment risks identified by the Dutch AG are not as obvious, and are less direct than, those faced by an investor in a typical UCITS (or indeed DC pension scheme), but would nevertheless appear to be real if, as a result of poor investment performance, scheme members may receive lower benefits. However, those investment risks are not risks which a member of a typical UK DB pension scheme faces whilst the scheme is ongoing.
So far as rights have accrued (e.g. due to a certain number of years’ service and salary), there is no scope for the trustees of a UK DB scheme to reduce benefits or to remove indexation (unless discretionary). Indeed, any investment risk faced by a UK DB scheme member is more indirect still; since employers are legally obliged to fund scheme deficits, the risk is that the fund falls into deficit (which may or may not be due to poor investment performance) and the employer becomes insolvent and unable to fund that deficit. Although in these circumstances the extent to which the members’ benefits can be provided will depend on the amount of the scheme funds and hence the investment return on them, this is perhaps too remote for members to be regarded as bearing any investment risk in the manner envisaged by either the CJEU or the Dutch AG.
Any decision of the Dutch Supreme Court which follows the AG’s opinion has no direct application in the UK, of course. In any event, the nature of current UK pensions regulation calls into question whether a similar conclusion could ever be reached in relation to a UK DB scheme. Any prospect of exemption would therefore appear to depend on whether ongoing litigation which seeks to argue for exemption of pension fund management as insurance rather than under the SIF exemption is ultimately successful.
