The U.K.'s Inland Revenue has opened the door to pooling of multinational corporate pension assets on a global scale through U.K.-based pooled investment vehicles.
Equally important will be the ability for money managers to create tax-efficient unit trusts for specialized asset classes and for smaller investors that can be marketed at home and abroad.
However, regulatory approval from non-U.K. tax authorities still needs to be won before the vehicles can be used practically. A consortium of pension advisory firms, backed by the U.K.'s Institutional Fund Managers Association, is seeking to win blanket approvals from various tax regulators.
For multinational corporations, the opportunity of achieving greater investment management efficiency and cost savings for their pension funds is extremely attractive. And money managers are savoring the prospect of boosting their penetration of foreign markets, and hope the vehicle will enhance London's stature as a financial center.
The Royal Dutch/Shell Group is considering the prospect of pooling assets from its smaller overseas pension funds, using either its internal management or external investment management, said Colin M. Price, investment services manager in London.
"This new tax ruling could help us to do that," he said.
New regulations, going into effect July 11, will permit creation of "pension fund pooling vehicles" that would be exempt from income, stamp and capital gains taxes. U.K. pension funds for both British employees and British expatriates working overseas automatically would be eligible.
Non-U.K. pension funds whose pension systems are broadly similar to Britain's would be eligible for a "fast-track" approval process from the Inland Revenue's Pension Schemes Office. Those countries include the United States, the Netherlands, Australia, Belgium, France, Germany, Ireland and New Zealand. Schemes from Guernsey, Isle of Man and Jersey also would be eligible. That list might expand over time.
In recent years, multinational corporations have sought a solution on how to pool pension assets from their overseas subsidiaries, but so far have been stymied by lack of a suitable vehicle. Off-shore vehicles and Dutch limited partnerships are two options, but both have their drawbacks, experts said.
The new Inland Revenue regulations permit establishment of the pooled vehicles in the form of unauthorized unit trusts, similar to U.S. mutual funds. (They are called unauthorized because they are not subject to the U.K.'s Financial Services Act.)
Creating a pool in Britain is viewed as a plus for institutional investors, who prefer the U.K.'s regulatory regime, rather than the murky legal environment often found off-shore.
The effort to create a U.K.-based tax free vehicle stems from a 1991 IBM Corp. initiative to create a global pooled fund. IBM ultimately shelved the project, but its law firm, Ashurst Morris Crisp, London, continued work on its own. IBM officials declined to comment on the latest development.
Meanwhile, the IFMA, consultant Watson Wyatt Worldwide and others were pursuing the same objective independently.
Three years ago, the groups decided to pool their efforts. Ashurst Morris also brought in Ernst & Young to delve into complex tax withholding issues with foreign tax authorities.
Without such approvals, investments could be subject to withholding tax by a pension fund's domestic government, explained John Watson, a partner with Ashurst Morris.
The firms hope to win blanket approvals for the U.K.-based pools, said Susan Douse, a senior consultant with Watson Wyatt, Reigate. The consulting firm will pursue sticky questions as to how much foreign pension funds will be permitted to invest in the pools. Many countries retain limits on foreign investments, thus limiting usage to specific asset classes.
"It's very exciting," but a lot of work remains to persuade tax authorities to approve the vehicle, Ms. Douse said.
Nor does she expect multinational corporations to rush to pool all of their pension assets worldwide once regulatory authority is won. Instead, a company might seek to pool together, say, U.S. equities or emerging markets stocks from various overseas subsidiaries.
Robert Ross, director of consulting at Frank Russell Co., London, said companies often overlook the significance of properly investing an overseas subsidiary's domestically invested pension assets, which usually comprise the largest portion of the fund. The new vehicle could give them more control over those assets, he said.
But many companies still have to face cultural hurdles to persuade local subsidiaries to pursue common investment strategies. Some subsidiaries' pension boards are reluctant to cede any control to the parent organization.
"I think the people issues are at least as difficult" as the legal questions, Mr. Ross said.
Opportunities for managers
The opportunities for money managers, however, are likely to be more immediate, experts said.
Through use of the pooled vehicle, a manager could create a U.K.-based vehicle that could be marketed to one or more countries' pension funds to invest almost anywhere or in specific asset classes, such as emerging markets or real estate.
The pools also might offer a way to enter foreigner-shy markets, such as the notoriously sticky German pension market. German pension funds often invest through Spezialfonds, special tax-efficient pooled vehicles for institutional investors that must be custodied by approved German banks.
The new U.K. pooled vehicle "really could take the lid off the ability to sell to Germany," said Colin McLatchie, chief operating officer for PanAgora Asset Management, London.
In addition, the Inland Revenue's ruling creates a level playing field between U.K. insurers and other money managers in offering pooled vehicles.
Now insurers can take advantage of an exemption from stamp duty for pooled vehicles.
This advantage effectively blocked Wells Fargo Nikko Investment Advisors, now merged with BZW Barclays Global Investors, from marketing pooled index vehicles in Britain.
"We are very pleased that the stamp-duty playing field has been leveled," said a BZW spokeswoman.
The new pooled vehicles also could help U.K. managers running balanced portfolios, who often invest the non-U.K. equity portion of pension portfolios in various pooled funds.
This way, managers could receive income on their investments on a gross basis, instead of having to reclaim tax paid on dividends, noted John Parsloe, a director at Mercury Asset Management PLC, and who represented the IFMA on the project.
The ability to avoid reclaiming taxes should reduce work for custodians.
If the U.K.-based pool were appropriate, "it would be ideal for us," said Jean-Pierre Steiner, vice president and corporate pension director for Nestle SA, Vevey, Switzerland. Nestle has 12 billion Swiss francs ($9.55 billion) in pension assets in about 40 countries.
Nestle officials have sought a way to pool the international investments of its various overseas pension funds, but so far have not found a suitable vehicle, he explained. Instead, it is using common investment strategies and managers where permissible.
Mr. Steiner noted some countries bar or restrict international investments, and others prohibit use of a common investment trust.
Shell's Mr. Price said the multinational might create pools for different asset classes for its nearly 40 smaller pension funds, which collectively manage about $9 billion.
Shell has about $35 billion in pension assets worldwide, but most are held by its Dutch, British and U.S. operations.
The company might rely most on its British and Dutch investment expertise, but also might turn to outside managers for investment of certain pools, he said.
Nat Duffield, director-trust investments, at Dallas-based Halliburton Co., said his company might be interested in pooling assets of its overseas subsidiaries, but would have to wait to see how the regulatory issues are decided.
Halliburton uses common managers for its more than $500 million in non-U.S. pension assets. It also uses State Street Bank & Trust as its single global custodian.