Wide fund choices face UK pension plans
The UK marketplace for pooled vehicles is a developing one. Pension funds wanting to invest their assets through a pooled vehicle have different options to choose from, but but their first decision when planning investment strategies should always be selecting the right fund manager
“Realistically, each manager offers only one type of pooled vehicles, so when you choose your manager you know that your assets are going to be invested in a particular type of fund,” says Stephan Breban, senior investment consultant at Watson Wyatt in London.
All types of pooled funds, whether they are open-ended investment companies (OEIC) offshore funds, unit trusts, pension funds pooled vehicles (PFPV) or life funds, have specific characteristics which make them more or less suitable for each individual client.
London-based Baring Asset Management finds in OEICs the best way of delivering a flexible range of products. “This umbrella structure offers a whole series of different funds that enables us, in conjunction with the pension fund trustees, to construct very specific portfolios for very specific benchmarks,” says Keith Thomas, assistant director and head of UK institutional pooled funds at Baring.
OEICs are widely spread among UK pension funds, although they have been critised for not being totally efficient. “The big disadvantage of OEICs is the fact they don’t accumulate income growth,” says Breban. “Also, when you transfer stock into or out of the fund you have to pay stamp duty which can be very costly.”
Although some believe that UK pension funds are still reluctant to invest in a fund listed offshore, this investing option is increasing. “I don’t think UK pension funds have any problem with the idea of investing offshore,” Breban says. “They could be concerned about the currency issue, because if the fund is denominated in another currency, this can make things a bit more complicated and could add risk,” he says. SICAVs, the European version of OEICs, can be listed in Dublin, Luxembourg or elsewhere, and also offer off-shore administration. They can be attractive due to tax considerations, but it seems that the majority still prefers to invest in UK exempt unit trusts.
Unit trusts are very similar to OEICs but they allow income growths to roll up and their fees are exempt from VAT.
Authorised unit trusts can be exempt approved. That means that only UK pension funds and exempt approved investors can invest in them. However, they also incur stamp duty for in and out transfers of assets.
A few years ago, in order to facilitate transfers, a specific type of unit trust was developed. This vehicle, the pension fund pooled vehicle (PFPV) allows making in and out transfers free of stamp duty and stamp duty reserve tax and have VAT exempt fees. “We find PFPVs very useful,” says Breban. “They are treated as transparent for tax purposes, so the clients are taxed as if they own the underlying stock. This is very good for pension funds and you can also use them for DC plans.”
Breban believes that managers who maintain that PFPVs are not efficient enough say that because they haven’t looked at them properly: “All the managers who are using them are very pleased with the way they are working,” he says.
Brighton-based Pavilion Asset Management agrees on the efficiency of PFPVs. They have just launched an eco fund under this structure which they believe will attract the interest of pension fund trustees. Peter Dale, fund manager at Pavilion says: “PFPVs are competing with other UK pooled vehicles because with this structure you don’t have to pay any cash getting in or out,” he says. “One of the biggest reasons for not changing your asset manager is the cost of transfers, and with PFPVs it can be relatively cost free, making the whole industry more fluid.”
The transfering of assets is also exempt of stamp duty when using life funds. “This and the fact that their fees do not incur VAT make them very efficient,” Breban says. The benefits of life funds are that they allow you to have several sector funds and use them as building blocks to build up funds. “Even though you can do this using OEICs, in my opinion, life funds are more efficient.”
“We also have a preference for life funds when setting up DC schemes, because they are more flexible and a little more efficient for tax purposes than OEICs,” Breban says.
The largest UK pension funds running segregated accounts are also increasingly using pooled vehicles for specific purposes. This was the approach taken by the Railway Pensions Scheme (Railpen) when they decided to set up their own series of pooled investment funds. With more than 100 pension sections and as many different asset allocations, these pooled structures enabled Railpen to buy the number of units needed to match different requirements and provide the different plans with an economy of scale.
“Large clients who have a number of subsidiaries in the UK are also increasingly using common investment funds which can invest in pooled vehicles,” Breban says. “These common investment funds are very useful for companies running several pension schemes.”
Most of the major UK fund managers are now offering some form of pooled fund vehicle and this trend is set to increase. “Selecting the most appropriate vehicle depends much on the size of the pension fund and on how the trustees want their assets to be invested,” says Baring’s Thomas. “A lot of people have the perception that a taylor-made shirt is more specific to them,” he adds. “The same as when buying clothes, in terms of investment we have to demonstrate that we can actually offer that specially designed product that they are looking for.”