European tax harmonisation remains the nemesis of fund promoters in the UK, Dublin and Luxembourg, where grand plans for a cross-border pension fund vehicle have been condemned indefinitely to a vicious circle of proposals, discussions and disagreements with little real progress being made.
The UK-initiated Pooled Fund Pensions Vehicle (PFPV) idea has not progressed greatly since its inception. The same taxation and regulatory problems exist now as they did before, not to mention the reluctance of EU member states to agree to a suitable domicile for such a fund.
To date, five European jurisdictions - Switzerland, Belgium, Guernsey, Jersey, and the Isle of Man - have respond-ed positively, says David Butler, senior manager at Ernst & Young, with the Swiss authorities accepting the idea in theory but holding back formal ap-proval until they see a live one", says Butler, adding, "We expect a few more of those."
The transparency issue is one hurdle the PFPV developers have managed to overcome. "A Swiss pension fund can invest in a PFPV and will be treated in Switzerland as if it had invested direct, so the concept of transparency which is the Holy Grail is confirmed in respect to those countries."
A number of fund managers in the UK have set up PFPVs and will be in prime position to add on countries when the opportunity arises. Managers, such as Scottish Equitable Asset Management, have recently jumped on the bandwagon to seek alternatives to the PFPV structure. But, admits Butler "the answerat the minute I would say is that there isn't a vehicle which can achieve the purpose that you want. PFPVs certainly come close but are still in their formative stages."
The Irish model, backed by practically the entire fund administration industry in Dublin, is encountering similar problems. Paul Cummens at Price Waterhouse, Dublin, who is leading the investigations into the tax issue, has been advocating a "pass-through vehicle". While this in itself would not solve the tax problem, he feels it would be useful in getting the scheme recognition in other countries.
An investment limited partnership domiciled in Dublin is the current favoured idea, which could be used by investors in Germany, France and the UK. However, the proposal has met with more confusion than appreciation, which he believes is because the scheme is seen as more complicated to operate than a conventional fund.
The partnership structure would also achieve the 'Holy Grail', allowing, for example, a German pension fund to invest in US equities where the assets allocated would be pooled with those of the other subsidiaries' funds investing in the same class. That particular portfolio would be run by one investment manager. A third-party administrator would act as general partner. "You would structure it so from a US perspective as well as from a German perspective - the limited partnership would be regarded as a pass-through vehicle, but the US treaty as it would apply to German pension schemes would apply so they would be no worse off than if they had made a direct in-vestment in the US."
Kredietbank in Brussels has been developing a fund over the past few years which is tailored specifically for small Belgian pension funds of between Bfr100-400m, on the same principle as Baillie Gifford's new fund aimed at the Irish pensions market, and is planning to take it further into Europe this year. The fund is designed to cater for the entire asset allocation needs of a typical scheme by offering a spread of sub funds investing in different asset classes. But whether the fund will be sold in its present form or tailored to each country is not yet known.
The Luxembourg discussions have moved on to the extent that two proposed fund vehicles have been named - SEPCAV(Société d'Epargne Pension à Capital Variable) and ASEP (Association d'Epargne Pensions). ASEP is aimed more at insurance companies and the defined benefit market, explains Pierre Corbiau, marketing at Banque Paribas in Luxembourg, while SEPCAV takes on a similar form to a SICAV and will be more appropriate in a defined contribution scheme. "ASEP is quite similar to a fund and it may use all techniques that were tailored for funds, say umbrella, intra-pooling which are two very important key elements to provide the promoter with life style funds with the sub funds corresponding to what the company wants to create for the future retiree, but providing one pool of assets with different classes for the fund managers."
The idea however is primarily aimed at expatriates from Japan and the US, as a second-tier pooled pension fund in Luxembourg is not likely until the EU directive on tax harmonisation is passed. "It is a Luxembourg project and should be enacted at the soonest in June and at the latest in December."
Another Luxembourg project, Credit Agricole Indosuez' cloning brainchild, has attracted $2.5bn of assets to date in Europe, though this remains restricted to the retail marketplace. And while it offers a viable working solution to cross-border distribution problems, the actual fund structure does not attack the multinational problem which continues to be hampered by different legal and investment restraints individual to each European country.
It is on this point that perhaps an-other important issue lies. Chase Manhattan in its own search for a viable solution has to date come against three barriers to make it efficient - tax and tax reclaim systems, regulatory problems, and interestingly, the reluctance of subsidiaries of multinationals to accommodate the investment policy of their parentcompany.
"It is true to say that there is resistance among subsidiary companies for a multitude of reasons of allowing their parent company to dictate how the subsidiary pension fund is run," says Mark Tennant at Chase in London, referring particularly to equity investments, where individual subsidiaries will be inclined to stay with either a local or existing provider.
"The pensions directive fell flat on its face - it was voted out! And that was a pretty minor affair compared with actually having legislation on pension funds and taxation on pension funds, common throughout Europe - that wasn't even part of the pensions directive. The main part of the pensions directive covered what you could invest in, and they couldn't even agree with that." In the midst of constructing a scheme that would suit the needs of a multinational, in waiting for that ever-elusive EU directive, in searching for a truly tax-efficient cross-border vehicle and overcoming regulatory red tape, perhaps the wishes of the subsidiaries themselves is more food for thought."