Sicav structure brings flexibility and simplicity
The Suez-Tractebel Pension Funds cover the Belgian employees of the Suez-Tractebel Group, which is based in Brussels, although it is owned by French utilities company Suez. The funds comprise three large defined benefit (DB) pension schemes totalling €1.3bn, which are almost closed, and two relatively new defined contribution (DC) schemes, which are much smaller in size. The portfolios are run by a number of external asset managers.
In November 2004, Suez-Tractebel Pension Funds consolidated all its investments into one newly launched Luxembourg Sicav, called Esperides. All of the DC assets, and practically the entire portfolio of DB assets, are now held within the Sicav.
Suez-Tractebel says that it was an easy decision to go for a Luxembourg-registered fund rather than another type of pooled vehicle based elsewhere.
There were two principal arguments for choosing Luxembourg. First, the institutional Sicav structure does not exist in Belgium. Because of this, Suez-Tractebel says it would have been forced to set up Ucits III vehicles to consolidate the portfolios. This would have given less flexibility to the managers in running the investments.
The second reason for consolidating the funds within the Sicav centred around tax considerations. The subscription tax for an institutional Sicav registered in Luxembourg had previously been one basis point. However, the tax was removed last year for funds that pool pension assets. In contrast, the equivalent tax in Belgium is seven basis points.
The new Sicav contains three sub-funds corresponding to the three different risk profiles used in the structure of the pension fund portfolios. These comprise the high risk profile (made up of listed equities, private equity and high- yield corporate and emerging debts); medium risk, which includes real estate, hedge funds and convertible bonds, and low risk, consisting of investment-grade bonds.
The Sicav was created to simplify the accounting and rebalancing requirements for the funds. Under the previous structure, each pension fund was obliged to maintain up to 40 different accounts, because of the number of specialist investment mandates used.
With the new structure, each fund now only needs to use three accounts, one for each sub-fund.
Suez-Tractebel says that a further advantage of the new structure is that it allows multi-employer pension funds, including its own funds, to maintain a specific asset allocation for each individual pension scheme, within the same overall fund. This means that each pension scheme can tailor its own asset allocation to specific parameters such as the maturity date of its liabilities, and the risk tolerance of the sponsor. It can then build up its own portfolio by allocating the chosen exposure to each of the three sub-funds, according to their different risk profiles.
One of the problems of smaller pension funds generally is the ability to achieve sufficient diversification. In the case of Suez-Tractebel, the new Sicav has been very advantageous for the DC schemes as it enables them to achieve a broad diversification of assets despite their currently limited sizes.
The switch to this new vehicle has been achieved with relatively little disruption to the administration of the funds. Suez-Tractebel is still managing the Sicav without having had to change its relationship with its external asset managers. The fees and additional expenses negotiated between Suez-Tractebel and its asset managers remain the same.
In fact, the amount of administrative work has been cut down substantially. The pension funds themselves are no longer the shareholders of the external funds they invest in. So the paperwork for transactions is now dealt with by the custodian of the Sicav on behalf of each of the three sub-funds. The net asset values (NAVs) of the three sub-funds are calculated by an administrative agent on a monthly basis.
There are now plans afoot to improve these arrangements still further. Suez-Tractebel hopes to have launched a fourth sub-fund by the end of this year. This should make the management of cash flows into and out of the pension funds more flexible.
The new sub-fund will invest in different exchange-traded funds (ETFs) and bonds. The aim of this is broadly to replicate the global portfolio structure using ETFs on the European and US stock markets, and EPRA Euro Zone and 1 State Bond with the same duration as the duration of the bond portfolio within the pension funds. This means the sub-fund will have a NAV which is available daily.
At present, the only institutions that can subscribe to the Sicav are those that have been created by the Suez Group for occupational retirement provision, or similar investment vehicles for the benefit of its employees. However, looking even further ahead, Suez-Tractebel says that it might be possible for other Suez Group pension funds, mainly those based in the Euro-zone, to invest in the Luxembourg Sicav.
Highlights and achievements
Pension fund administration can be both complex and costly, and this innovative approach to the problem is already reaping rewards for Suez-Tractebel. By setting up the Esperides Sicav with its three sub-funds, each pension fund now has a portfolio containing a maximum of three different funds, rather than 40 funds, as was the case previously. This makes accounting and rebalancing much easier.
It is now much simpler for the individual pension funds to build up their portfolios using only the three sub-funds with their different risk profiles, rather than the plethora of external funds which were previously available. However, the planned fourth sub-fund will increase the funds’ flexibility in making asset allocation decisions.
The Sicav has also helped the smaller DC funds to achieve a much higher level of diversification than they previously enjoyed.
Suez-Tractebel Pension Funds has made the switch for relatively little cost, thanks to the tax advantages of using a Luxembourg-based Sicav. And it has achieved a smooth transition, maintaining continuity in its relationships with external asset managers.