The makings of a winner
Year-end prognostications about the evolution of the securities services product set are always an ill-advised enterprise – after all, it was only after the fourth year of commentators touting it as the next big thing that outsourcing finally deigned to take off as ‘predicted’. However, if I were a betting man, I would be heading post haste down the bookies to back the runaway favourite in the 2006 NBT Stakes: pension pooling.
If the likes of Northern Trust, State Street, Citigroup, ABN AMRO Mellon and JPMorgan have their way, in 12 months’ time the term pooling will have become as ubiquitous as outsourcing itself – even if the number of clients who have actually gone live with such structures can currently be counted on one hand, and furthermore are in no rush to publicly disclose their identities.
Establishing and running multiple pension plans across multiple jurisdictions with their own diverse regulatory environments clearly poses significant operational and tax challenges for multinationals despite the advent of the Occupational Pensions Directive. On the face of it, consolidating assets from those scattered plans within a single, centrally administered pool would seem to offer such obvious benefits in terms of providing enhanced administrative and cost efficiencies as well as mitigating risk and improving governance that the casual observer would be forgiven for asking why it isn’t already standard practice. After all, are there not now ‘common funds’ - in the shape of Luxembourg’s Fonds Commun de Placement (FCP) and in Ireland the Common Contractual Fund (CCF) - which allow cross-border investments to be pooled within a single tax transparent structure?
If it only it were so straightforward. If misgivings over how proprietary information and intellectual property rights would be preserved within a pooled structure have now largely fallen away, there is no getting around the fact that setting up such vehicles is still a laborious process.
While some recent developments have been helpful - not least the extension of the CCF to include non-UCITS mandates - the business of confirming that the requisite transparency criteria have been met still has to be conducted on an individual basis whenever a pooled vehicle is set up.
Until national regulators or tax authorities are prepared to rubber-stamp all CCFs or FCPs as a matter of course, then pooling will remain a minority sport. Similarly, a lot of effort needs to be expended on internal corporate governance work if trustees are to be won around to the pooling concept.
Taxation is identified as a significant barrier to pension pooling by 70% of multinationals polled in a new survey conducted by Deloitte. “No matter which vehicle is chosen, which country the participating plans are located in, or which investments are being pooled, tax invariably plays a central role in all decisions,” says the firm’s head of pensions pooling, Gavin Bullock.
Nonetheless, 80% of multinationals indicate that they are currently considering pension pooling solutions. “Companies considering implementation varied in size and geographical coverage, and 20% were planning to do so within the next 12 months, and a further 33% the following year,” said Bullock. “Given a lead time of up to a year to establish a pooling vehicle, this timetable provides a strong indication of how far many multinationals are down the implementation process.”
No less than 87% of respondents identified financial benefits as the key driver for taking the plunge into pooling, although improved risk management and governance were also cited as important factors, and by consolidating assets within a single pooled structure allows them to be better controlled.
Overall a multinational can leverage greater buying power, broader asset diversification and improved performance for its funds across all the markets in which it runs pension plans. There has been a long-held assumption that pooling best suits corporates running pension plans across multiple jurisdictions, and this seems to be borne out by the survey. Around 75% of multinationals considering pooling have total assets of more than £1bn (e1.5bn), while 80% also have plans based in at least 10 different countries.
“That is unsurprising given that these companies will have the most to gain,” said Bullock. “Despite this, it is worth noting that our experience shows that smaller plans can often achieve the highest financial benefits from joining a pension pooling programme. Smaller plans are likely to be paying the highest rates of fees and may be restricted in areas such as manager diversification or yield enhancement strategies, including stock lending, due to their size.”
All of which will no doubt be music to the ears of the custodian banks, eager to leverage their technological muscle and expansive networks to claim the high ground in what could prove a fertile new territory indeed. Pooling: the new outsourcing? Place your bets now, ladies and genetlemen.