Establishing a retirement fund in Malta

Introduction

In the last few years, Malta is increasingly becoming the jurisdiction of choice for a number of financial services operators who look at Malta as the ideal platform from where to target their European clients. Malta’s success can be largely attributed to the manner in which the industry is regulated - a prudential but flexible approach, whereby the industry is highly regulated but at the same time allowing room for adaptability and innovation. Moreover, Malta’s tax regime is very stable and thus provides the desired certainty, especially through its 50+ double taxation treaties.

The jurisdiction is committed to support the industry and to look into ways how new applications and solutions can be devised in order to continue expanding this important economic sector. Among the latest introductions, one relates to the establishment of new retirement schemes and funds.

The MFSA

The Malta Financial Services Authority (MFSA) is responsible for the licensing, regulation and supervision of all financial services operators and was established on the 1st October 2002 by the Malta Financial Services Authority Act as an autonomous public authority. It succeeds the Malta Financial Services Centre (MFSC) which was established in 1994.

The MFSA requires the highest standards of probity and honesty. Every licence is issued subject to standard conditions which may be adapted to suit certain circumstances so long as standards are not compromised.

Retirement funds

Retirement schemes are schemes or arrangements under which payments are made to beneficiaries for the principal purpose of providing retirement benefits. Then, a retirement fund is a company established for the principal purpose of holding and investing the contributions made to one or more schemes or to one or more overseas retirement plans. The principal legislation that affects retirement funds in Malta is the Investment Services Act and the Special Funds (Regulation) Act. These Acts establish the regulatory framework for the licensing of Retirement Schemes and Retirement Funds.

Retirement funds may only be set up in Malta upon registration under the Special Funds (Regulation) Act. A retirement fund registered under this Act is not subject to any licensing requirements under the Investment Services Act. This is a reflection of the principle that lex specialis derogat generalis. A retirement fund may be established in the form of:

• an investment company with fixed share capital; or
• an investment company with variable share capital;
• in both cases for the principal purpose of holding and investing the contributions made to one or more schemes or to one or more overseas retirement plans.

The retirement fund’s head office needs to be based in Malta and its objectives must be limited to:

• the receipt of contributions made by one or more schemes, and/or by one or more overseas retirement plans, and the investment of such contributions and all return on such contributions in instruments or immovable property with the aim of maximising return on such contributions;
• the payment of retirement benefits to the beneficiaries of the schemes or the overseas retirement plans which have invested in such retirement fund and matters or functions ancillary thereto.

Naturally, the assets of the retirement fund may not be used for the benefit of any investor in the retirement fund but may only be used exclusively for the purpose of providing retirement benefits to the beneficiaries of the schemes or the overseas retirement plans. The retirement fund is required to have a board of directors made up of at least three directors which are to be independent from the fund administrator and from any contributor which is a business concern. The directors of the fund must act solely in the interests of the investors into the fund. At least one individual or company acting as director of the fund must be resident in Malta. Corporate directors will only be permitted where:

1. an individual within the company is identified as the person responsible for the functions of director to the fund; and
2. the company concerned is involved in financial/investment services-related activity;

The company secretary (whether individual or corporate) is required to be resident in Malta, and will require the MFSA’s approval. It will also need to demonstrate that it holds a professional qualification. In this respect, the following qualifications are considered appropriate:

1. membership of the Institute of Chartered Secretaries and Administrators;
2. holders of an LL.D. degree;
3. holders of a CPA/CPAA warrant;
4. an academic or professional qualification considered by the Authority to be comparable to any of the above coupled with appropriate experience and/or training in a relevant discipline. 

Corporate Secretaries will only be permitted where an individual within the company is identified as the person responsible for the functions of secretary to the Scheme.

The MFSA needs to be satisfied that the promoters, the directors and the retirement fund administrator, any asset manager and custodian are fit and proper persons before it may proceed to register a retirement fund.

Like in the case of any other collective investment scheme, a retirement fund can be established as a multi-class company with various sub-funds or pools of assets. This means that a retirement fund may be constituted of several asset classes or pools of assets to match the varying objectives of different retirement schemes pooling their assets in the retirement fund. A retirement fund can also be constituted as a multi-fund company in a manner whereby each sub-fund would constitute a patrimony of assets and liabilities which is separate from that of any other sub-fund. In such case, in addition to registration being obtained for the umbrella retirement fund, each sub-fund will necessitate a registration by the MFSA.

Where a retirement fund is closed-ended, the authorised and the issued share capital may be increased or reduced with the advance permission of the MFSA.

The main players

The retirement fund administrator

Every retirement fund needs to appoint a retirement fund administrator. The board of directors of the retirement fund have the duty to appoint the retirement fund administrator, and enjoy the right to remove it at their discretion. The assets of the retirement fund are to be held in custody by the retirement fund administrator or an entity which is registered under the Act as custodian of retirement funds. The retirement fund administrator’s business is to be run by at least two individuals resident in Malta and the retirement fund administrator must maintain net tangible assets at least to the tune of €116,468.67.

Subject to what is stated in the retirement fund’s constitutional documentation, a retirement fund administrator may delegate his functions to a sub-administrator. In any case, this is subject to the MFSA’s consent. Irrespective of any such delegation, ultimate responsibility still lies with the fund administrator, who must ensure that the functions it outsources will not be outsourced again by the service provider to another service provider. This however does not apply to the custodial function, whereby a custodian who has been appointed by the fund administrator can in turn appoints one or more sub-custodians to hold custody of the retirement fund’s assets.

The retirement fund administrator is responsible for maintaining or arranging custody of the fund assets. This means that the retirement fund administrator may carry out the custody function itself, where it satisfies the criteria applicable to registered custodians of retirement funds. Alternatively, it may appoint an entity which is registered under the Special Funds (Regulation) Act as custodian of retirement funds to hold the assets of the retirement fund in custody.

The fund administrator is also responsible for ensuring that that the sale, issue, repurchase, redemption and cancellation of units effected by or on behalf of the retirement fund are carried out in accordance with any guidelines issued by the MFSA, the constitutional documents and the most recent fund particulars. The fund administrator must also supervise the operation of the fund in a manner that ensures that the management of the fund complies with the applicable investment restrictions. Finally, it is also responsible for ensuring that the value of units of the fund is calculated in accordance with the provisions of the constitutional documents.

Where the post of retirement fund administrator becomes vacant, the directors of the retirement fund shall are obliged to appoint another person to fill the post within fourteen days. In default, the MFSA may appoint a person to the post on an application made by any one of the directors or by a contributor or beneficiary. During the period of the vacancy, any officer of the retirement fund authorized generally or specifically in that behalf by the directors can carry out the functions of the retirement fund administrator.

The asset manager

The retirement fund may in its discretion appoint an asset manager in order to manage the investments of the retirement fund. Otherwise, it may elect to entrust the asset management function to the board of directors themselves, who may invest all money and other assets received by the retirement fund in accordance with its memorandum of association. Subject to the terms of its appointment, the board of directors of a retirement fund may replace the asset manager with a new asset manager at any time.

The retirement fund custodian

No person, other than a retirement fund administrator can provide or hold itself as providing custody services to a retirement fund, unless such person is registered with the MFSA to act as such. A custodian of a retirement fund must be an entity having the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to maintain custody of assets. It must also:

• hold an appropriate license under the Investment Services Act; or
• be licensed under the Banking Act; or
• be an authorised credit institution in a country where in the opinion of the MFSA it is subject to adequate regulatory supervision, provided such institution has an established place of business in Malta, or
• be such other entity acceptable to the MFSA.

A retirement fund custodian which is already registered under the Special Funds (Regulation) Act may apply for MFSA’s authorisation to provide its services to:

1. a retirement fund which is already established and registered;
2. additional retirement funds. In such cases, the following documents would need to be submitted:

1. details of the retirement fund to which services will be provided;
2. copy of the agreement to be entered into with the retirement fund / retirement fund administrator;
3. confirmation that the retirement fund custodian has the necessary resources to carry out the additional work to an acceptable standard, together with brief details of the basis for such confirmation/details of such resources – primarily in terms of staff and systems.

In the case where the company applying for registration as a retirement fund custodian is already licensed under the Investment Services Act as custodian of collective investment schemes or is already licensed under the Banking Act 1994, an abridged application process applies. The retirement fund custodian must maintain net tangible assets at least to the tune of €116,468.67.

In the exercise of its functions, duties and responsibilities, the custodian is bound to act independently of the fund and/or the asset manager and solely in the interest of the holders of units or participants in the fund and of the fund itself. The termination of the appointment of the custodian does not come into effect prior to the appointment of another custodian, and the conveyance of the assets held in custody by the outgoing custodian to the new custodian – the same holds good in the case where the custodial function is being undertaken by the retirement fund administrator.

In order to maintain a degree of independence, except as may be authorised by the MFSA, a person shall not act as a member of the board of directors of the fund or of the asset manager, or similar organ or as an officer responsible for the administration and management of the asset manager and at the same time hold a similar position with the custodian.

The custodian is bound by the applicable regulations to hold the fund’s monies in specially-created segregated accounts and which cannot be commingled with other assets. Such account is to be named "Retirement Fund Bank Account" and bear the name of the Fund. The law goes to such an extent to protect such assets that the custodian is required to ensure that the bank acknowledges in writing that it renounces, and will not attempt to enforce or execute, any charge, right of set-off or other claim against the account, or combine the account with any other account in respect of any debt owed to it by the entity, and that interest payable on the account will be credited to the account and that it will deal with the assets in accordance with the entity’s instructions.

Other players

Every retirement fund needs to appoint an auditor. No auditor can be appointed where the individual directly responsible for the audit or her/his firm is a person who is not independent of the retirement fund or a person who is engaged under a contract of service to provide non-audit services to the fund administrator or to any employer acting as contributor to a scheme or overseas retirement plan investing in the retirement fund.

Fund Particulars and Investment Restrictions

Every retirement fund in conjunction with its fund administrator is required to have a document called ‘fund particulars.’ The purpose of this document is to convey detailed information regarding the manner as to how the fund operates to any interested party – namely contributors and beneficiaries. The fund particulars must necessarily contain:

• a description as to how the assets of the retirement will be invested;
• a statement of the fund’s investment objectives;
• information on the identity of the service providers, as well as the extent of the services they will be offering;
• the extent, if any, to which it may invest in contributor-related investments and the types of contributor-related investments which it may invest in;
• the fund’s policy on the kind of investments to be held, the balance between different kinds of investments and any risk parameters;
• the fund’s policy on the realisation of assets;
• any formally adopted criteria such as benchmarks and performance time scales for measuring the retirement fund’s or its asset manager’s investment performance;
• the fee structures in relation to the service providers of the retirement fund, as well as other details of all other fees, charges, taxes, commissions and other costs to be borne directly or indirectly by the fund.

A retirement fund may invest its assets in various financial instruments. In any case, the retirement fund and any asset manager are bound to give due consideration to the security, quality, liquidity and profitability of the fund’s portfolio as a whole. Diversification is also an important element and needs to be managed in such a manner which avoids accumulations of risk in the portfolio as a whole – as much as this is possible. Essentially this all boils down to the ‘prudent man’ principle whereby the fund and its service providers are required to act in the best interests of the beneficiaries and must discharge their duties with a high degree of care, skill, prudence and diligence.

The MFSA has issued guidelines in relation to certain parameters within which such investments may be made. These parameters are designed in a manner which strikes a good balance between the need to safeguard the interests of the beneficiaries while at the same time allowing the retirement fund ample room to make the most out of the investment opportunities available. In any case, the MFSA may be flexible in the application of certain of the relevant restrictions, especially in appropriate cases where the circumstances and the nature of the retirement fund render such a derogation justified.

The parameters are as follows:

1. the fund is to be predominantly invested in regulated markets;
2. the retirement fund cannot invest more than 10 per cent of its assets in securities which are not traded in or dealt on a market which:
   1. is regulated, operates regularly, is recognised and is open to the public;
   2. has adequate liquidity and adequate arrangements in respect of the transmission of income and capital;
3. the fund must derive in each fiscal year at least 90% of its gross income from dividends, rent or interest payments with respect to instruments or immovable property, or from gains from the sale or other disposition of such instruments or immovable property, or from other income derived with respect to its business of investing in such instruments or immovable property;
4. the retirement fund is to be properly diversified in such a way as to avoid excessive exposure to any particular asset, issuer or group of undertakings;
5. the retirement fund cannot invest more than 10 per cent of its assets in securities issued by the same body, but this restriction does not apply in the case of any transferable securities issued/ guaranteed by the government of Malta or of any other EU/ EEA Member State.
6. no more than 10% of the assets of the retirement fund are to be kept on deposit with any one body, but this limit may be increased to 30% in respect of money deposited with a bank licensed under the Banking Act of Malta, 1994, or with a bank outside Malta where this is established and regulated in an EU/EEA member state.
7. the retirement fund cannot hold more than 10% of any class of security issued by any single issuer.
8. the retirement fund may invest in the units of collective investment schemes subject to the following:
   1. where a commission is received by the asset manager or administrator of the retirement fund by virtue of an investment in the units of a collective investment scheme, that commission shall be paid into the retirement fund;
   2. where the retirement fund invests in the units of a collective investment scheme which is administered/managed by the same retirement fund administrator/asset manager or administered/ managed by an associate of the fund administrator/asset manager, arrangements are to be made to eliminate more than one set of administration/management charges and charges which the administrator/asset manager or associate of the fund administrator/asset manager may be entitled to charge in relation to the acquisition/disposal of units in the underlying collective investment schemes;
9. the retirement fund may employ techniques and instruments relating to transferable securities for the purposes of efficient portfolio management. The retirement fund may employ techniques and instruments intended to provide protection against exchange rate and other risks in the context of the management of its assets and liabilities;
10. the retirement fund may invest in derivatives as long as these are used a means of reducing risk or facilitating efficient portfolio management. Such investments must be valued on a prudent basis, taking into account the underlying asset, and must be included in the valuation of the fund’s assets. The retirement fund is also obliged to avoid excessive risk exposure to a single counterparty and to other derivative operations. The retirement fund cannot be leveraged or geared in any way through the use of futures, options or other derivatives;
11. unless prohibited by the retirement fund’s constitutional documents, the fund may borrow - as long as the borrowings do not exceed 10% of the value of the fund, and provided that such borrowing is temporary and for liquidity purposes;
12. the retirement fund cannot grant loans or act as guarantor on behalf of a third party - this is without prejudice to the right of the retirement fund to acquire debt securities;
13. The retirement fund cannot invest in a feeder collective investment scheme or in another retirement fund.

Avoiding conflicts of interest

A retirement scheme administrator is required to be a separate person independent from the retirement fund administrator. The directors of a retirement fund are required to be independent from the retirement scheme and from the retirement fund administrator. Moreover, where the directors of the retirement fund invest all money and other assets of the retirement fund through an asset manager, then the retirement fund administrator and the asset manager are to be separate persons and shall act independently of each other.

In those cases where a contributor to a scheme is a business concern, the directors of the retirement fund are also required to be independent from such contributor. Moreover, the retirement fund administrator is to be a separate person from and independent of the contributor of any retirement scheme which invests in the retirement scheme for which it acts as administrator. While such independence does not preclude a contributor from being represented on the fund administrator’s board of directors, there must be a majority of directors on the board who are independent of any contributor.

As per the applicable Standard Operational Conditions, neither the fund administrator nor any of its affiliates can deal with the fund or any scheme investing in the fund as a principal or for its own account unless the terms of the transaction or arrangement are on normal commercial terms as if negotiated on an arm’s length basis and the transaction entered into by the fund is on the best terms reasonably obtainable having regard to the interests of the fund.

Asset managers also need to be taken into account in maintaining a certain level of independence, in fact, any asset manager appointed to the retirement fund, and the retirement fund administrator are required to be separate persons independent of each other. Finally, a person cannot be a director on a retirement fund or on an asset manager and at the same time hold a similar position with the retirement fund administrator or the retirement fund custodian as applicable.

As one can appreciate, the complexity of the above rules is rendered necessary in view of the desirability of having an industry that is built on solid grounds and that enjoys a very high degree of reputability in the eyes of whoever wishes to invest or participate in such schemes. Depending on the particular circumstances of the case, it may also be possible for the MFSA to relax some of these rules, provided that the welfare of the investors is still safeguarded and the retirement scheme or the retirement fund would still operate in a fair and efficient manner.