Start of the pooling plunge?
Several years of work have gone into Unilever’s giant asset pooling vehicle. After a long period of decision-making, logistics and negotiation, the €5bn multi-fund vehicle, named Univest, was finally launched at the end of last year.
The multinational consumer products group set up Univest to provide a central investment pool that its many corporate pension schemes could make use of. Unilever has 98 separate schemes holding total assets worth around €16bn. Initially, the group’s Dutch and UK pension funds are putting more than €1bn each into Univest, but in time, the company says the vehicle could grow to around €3-5bn.
Univest has been set up as a Luxembourg-based Fonds Commun de Placement, and it will be run by Northern Trust, which will also be providing custody and administration.
This is certainly a model that other multinationals are likely to follow, says Mark Evans, consultant at PricewaterhouseCoopers in Luxembourg. “I know of a number of asset managers who are designing and investigating similar (models),” he says.
Gerd Gebhard, director of Luxembourg consultancy Pecoma International, says he expects more vehicles to be set up, as more and more companies look for efficiencies in the management of their pension assets and are prepared to go outside their home country.
“The externalisation of pension assets held for funding book reserve schemes in the wake of the introduction of International Financial Reporting Standards (IFRS) will contribute to this tendency,” he says.
Mark Walker, principal at Mercer - which helped put the project together and has been appointed to provide manager research, monitoring and fund structure services - also sees others following suit. But he points out that it is not something to be taken lightly.
“It involves investment in a number of different areas,” he says and for this reason, it is important that the management of any multinational considering such a move would back this. “It is important that the culture of the organisation would support idea sharing,” he says.
Some 14 managers have been appointed by Univest to run 22 mandates in six separate sub-funds. At the moment, only equities will go into the vehicle, but the company has said that bonds, hedge funds and other assets could be added to the mix later.
The sub-funds are ring-fenced, so each has units available for purchase, meaning that one has to buy and sell to transfer assets between sub-funds. This structure enables each individual Unilever pension fund to continue to define its own investment strategy geographically.
There are some important prerequisites from any global corporation entering into this kind of arrangement, says Walker. “It needs a degree of commitment from senior management and generally from the corporate culture in order to fit with this pooling and sharing… and an initial amount of assets above a certain level to get the economy of scale.”
The level at which this type of proposition becomes interesting is $2bn, he says.
“The benefits of pooling outweigh many of the implementation issues and the timescale that you need to make this work. A number of multinationals have already got pooling vehicles, although they are not as complex as this one,” says Walker.
For corporations with several different pension funds, but perhaps with a lower volume of assets than Unilever, there are other options which can bring some of the benefits of asset pooling. “There are also other steps you can take before you get to pooling,” says Walker.
Companies can set up a preferred provider network, for example. This can give their individual pension schemes some of the benefits, including consistency of quality, access to managers that a smaller fund might not get, and global fee deals.
For Univest and any similar vehicle, tax should be a neutral issue, says Evans, in that the pooling vehicle must be tax-transparent; so the underlying investing pension fund would find itself in the same tax position as if it directly invested in the portfolio.
Walker explains that without tax transparency, investing via a pooling vehicle would add another jurisdiction to the investment process, possibly incurring an extra set of withholding taxes, for example. Transparency in this sense means that from a tax perspective, the vehicle does not exist.
“Some vehicles are not tax-transparent,” he says. “If you’re moving money from segregated management to a pooled vehicle, you need to make sure you’re not disadvantaged from a tax perspective.”
Regarding the choice of domicile for the vehicle, Evans says the tax treatment in Luxembourg would be broadly the same as Ireland’s Common Contractual Fund, in that there is no Luxembourg tax levied on investments held.
Whether or not tax treatment in Luxembourg is favourable compared with other domiciles was less important for Unilever than other tax considerations. “The necessity for us is that it’s tax-transparent,” says Unilever spokesman Trevor Gorin.
The FCP structure was chosen over the Irish CCF because it was familiar to the tax authorities. Gorin says: “Another consideration for us was that FCPs have been around for quite a while and are therefore relatively familiar, whilst CCFs may have similar tax-transparency, they are relatively new.”
Unilever said that initially, one drawback to Luxembourg was the one basis point tax d’abonnement which would normally have been levied. But the finance ministry in Luxembourg has created a new class of investor called ‘multinationals’, which means investments from pension funds of the same group are exempt from paying this tax.
There are many other benefits to this type of asset pooling vehicle, says Evans. Apart from reduced asset management fees, the investment risk is reduced, and asset allocation is more efficient than would otherwise be the case. Such a vehicle allows access to a greater range of instruments, and control and oversight are centralised, he says.
Valuation policies remain the same, but transaction costs are lower, he says.
It is its sheer size, and the cost consequences of this, which is the real point of the project. “Economy of scale is probably the main advantage – giving us leverage in negotiations with suppliers, of course,” says Gorin.
“But other pluses include improving the overall quality of asset management - giving some of the smaller pension funds in particular, access to expertise that they wouldn’t otherwise have - better risk management and tax transparency,” he says.
There are also potential savings in resource requirements at a local level, for individual pension schemes, says Walker. “They may find that by investing in the pooled vehicle there are time and cost savings in that they are investing in a vehicle with a governance structure,” he says. Other parts of the parent organisation have already taken on the role of governance, a role that might otherwise have had to be fulfilled by the local pension scheme itself.
The pooling vehicle also opens the prospect of increased returns, in that it could lead to better deals on securities lending or commission recapture, he says. “You could potentially get better cash flow,” he says. For example, the structure allows investors and disinvestors to be paired directly cutting out some of the need for sale and purchase of securities.
How much further might Unilever take the concept of centralised asset pooling? Even though the vehicle is already predicted to expand to up to €5bn in assets, this is still less than a third of total Unilever pensions assets.
Gorin says any future development of Univest will only happen in conjunction with the individual pension funds. “Univest will be developed in partnership with the Unilever’s individual pension funds,” he says. “Clearly, the aim is to offer options that are attractive to the individual funds.”