EUROPE - Global custody group State Street says it is introducing a ‘virtual’ product for multinational pension fund asset pooling.
“This enables pension fund assets to be legally, beneficially and directly owned by the funds participating in the pool,” William Slattery, who heads State Street’s business in Ireland, told the IPE Multi-pensions conference in Amsterdam this week.
Where a pension fund invests in a collective investment scheme it will typically attract the withholding tax status of the domicile of the scheme, he said. “The tax leakage through use of the standard collective investment vehicles is considerable,” he said.
“For UK pension funds, investing in offshore variable capital companies, additional withholding tax leakage amounted to 32 basis points, of which US equities amounted to 29bps,” Slattery pointed out.
There are current structures offered by State Street and some competitors which allow pension schemes to invest in a tax efficient manner. These include Ireland’s CCF, Luxembourg’s FCP, the UK’s PFPV and Cayman’s LLP.
However, the virtual pooling product, which is a development of the hub and spoke concept by State Street in both Luxembourg and Dublin goes further. It permits pooling of portfolios, without intermediary vehicles or as a complement to these vehicles. “Our technology allows pension funds to retain the benefits of their own legal status.”
Slattery gave the example of a multinational with pension schemes in Japan, the Netherlands and the UK, participating in the virtual arrangement. The multinational’s funds could allocate assets to the different preferred asset managers in the proportions desired.
“They would own these assets directly, but benefiting from the cost and transparency advantages and risk management benefits of pooling,” he said. “It enables assets to be directly accounted for and reported to individual pension fund assets held and not as units.”
Slattery said: “There is one caveat – the regulatory environment of each pension fund must permit virtual pooling.” State Street has had contracts drawn up which allocate legal and beneficial ownership in a pooled arrangement between different legal entities (extra pooling). These have been approved by the Irish and Luxembourg regulators. Slattery added; “It is a natural progression to apply these contractual terms to pool the assets of multinational pension schemes”.
As an indication of what potential State Street sees for this product they have committed around 70 full time employees to its implementation. “We do not believe that any of our competitors are within 18 months of doing what we have done,” Slattery claimed.