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Liam Kennedy spoke with Universal Investment about an alternative to the Spezialfonds that could also assist Germany's first steps towards attracting international pension pooling business

Ireland and Luxembourg have long enjoyed a monopoly on variable capital closed funds. When it comes to international retirement structures, they have also been joined recently by Belgium and the Netherlands, but now Germany wants to get in on pension pooling and has launched a new structure to compete as a complement to the Luxembourg SICAV.

The Investment AG (IAG) had been created in 1998 but lay dormant for a decade because of what Universal Investment describes as "construction errors". It was reconstituted under the Investment Act that came into force at the end of 2007, and Universal Investment is one company to make use of the new structure, which represents an alternative to the traditional Spezialfonds vehicle. Universal, for example, has created a pooled IAG for its clients to join or can set up a tailor-made construct according to individual clients' needs.

Markus Neubauer, managing director for institutional sales and relationship management at Universal Investment, points out that, in practice, there is no difference between a master KAG construction and an IAG, in terms of investment rules and asset classes that are permitted. Indeed, the most recent Investment Act permitted the inclusion of new risk asset classes, including hedge funds. However, an IAG does offer some advantages for investors, through its efficient struture.

"Under the previous investment rules the separation of company assets and investor assets were not possible and this possibility is creating new opportunities for clients," says Neubauer.

Demand is likely to be from asset managers and German corporates looking to pool their international pension assets. However, one key problem is that Germany has not signed the range of double taxation agreements necessary to make the IAG a useful pooling vehicle, and Neubauer confirms that there is currently muted interest in the area of pooling. However, he believes that Germany's high standards in terms of transparency and reporting, and structures like the master KAG, mean that Germany is an ideal country for pension pooling business. CFOs of German companies might also prefer to domicile assets locally for reasons of convenience and efficiency. German CFOs are also familiar with local investment structures.

Two other areas are increasingly coming into focus for corporates, adds Neubauer. "One is the topic of costs, centralised capital management and cost saving, and the second is risk management. Do I want my subsidiaries to run their own risk management independently or do I prefer to concentrate it in order to have a better risk overview in measurement, reporting and tax? We can foresee that companies will want to concentrate in this area in order to manage risk better." Moreover, smaller subsidiaries are able to access asset classes that may have been closed to them before for reasons of scale.

Universal has been expanding its range of services alongside pure fund administration in recent years. It collects risk data and offers clients risk measurement not only in investment assets but also in terms of direct investments. Here it works with RiskMetrics to provide individualised client risk reports and Neubauer says this is increasing in popularity, particularly given the recent economic crisis. Universal can also offer an enhanced constant portfolio protection insurance strategy (CPPI) in conjunction with an external party and which aims to appeal to domestic institutions. It also offers passive investment and overlay strategies.

As for tax hurdles - Belgium signed extensive double taxation agreements with the US before it launched its new pension vehicle, the OFP, in 2007 - Neubauer believes these are surmountable. "We are having conversations with a number of parties and sit on a working group that is dealing with aspects such as tax transparency," he says. "This is so that clients can choose the country that is best for them and not just in terms of tax. But there must be a level playing field for all, so that they can choose in terms of transparency and cost efficiency in terms of administration."

Neubauer concedes that Universal is not going to take Europe by storm with the IAG vehicle straight away, but does claim that his firm has experienced considerable interest. "This topic is still relatively fresh. Investment companies are placing it more and more in the market. I'm convinced that a number of Investment AGs will be started, each with a client behind them, and that there will be more investment through Universal's pooled Investment AG." He also says that Universal would consider giving a seat on the supervisory board to a large investor in its pooled IAG in order to grant them the legal benefits of the new structure.

"We think that this vehicle will gain greater international acceptance, like the Luxembourg SICAV," says Neubauer. "And it is important with pooling, when for example a German company wishes to pool assets of different European subsidiaries. We have to make sure that everyone is aware of this vehicle and the construction, and that an IAG is a possibility."
 

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