UK DB pension schemes lose up to £250m a year
03 July 2020 London
Image: ZGPhotography/Shutterstock
UK defined benefit (DB) pension schemes are losing out on over £250 million of additional income per year in their global equity portfolios, according to new research from the Asset Management Exchange (AMX) and Northern Trust, conducted by Broadridge Financial Solutions.
The research suggested that the large losses are down to DB pension schemes investing via less tax-efficient fund structures than those available.
It revealed that nearly three-quarters (72 percent ) of DB schemes are using fund structures that are tax inefficient, including unit trusts, investment trusts and open-ended investment companies (OEICs).
Additionally, it was found that seven-in-10 (69 percent) of schemes using less-tax-efficient funds admitted they were unaware of the investment income benefits that tax transparent funds have compared to other fund structures.
The research identified that a further 82 percent said that tax efficient fund structures for equity investments were not included in their scheme's risk register.
UK pension schemes, as tax-exempt investors, are entitled to apply for reclaims or reduced withholding tax on dividends from equities under double taxation agreements or domestic tax law provision.
The research indicated that unless they invest via tax transparent funds or insurance policies for their pooled fund investments, DB pension schemes will not be eligible to reclaim any withheld tax paid to foreign governments on their foreign equity holdings.
Elsewhere, the study shows that a total of £56 billion was invested in less tax-efficient funds by UK pension schemes last year.
According to the study, this has led to a lost income of up to £256 million for DB pension schemes last year alone, or nearly £2.5 billion over the next decade.
It was highlighted that this loss could be mitigated if these pooled equity investments were optimised for tax efficiency through the use of a tax transparent fund.
Oliver Jaegemann, CEO of AMX, said: “In the current environment due to the COVID-19 crisis, many pension scheme trustees and their advisors are facing widening funding gaps, scheme sponsors in financial difficulty, and deliberations on re-risking their investment strategies. This is an important time when DB pension schemes should be looking to take advantage of every revenue stream available to them.”
Jaegemann continued: “To miss out on over £250 million in investment income each year seems like an own goal, particularly when the revenue is independent of market movements and can be reduced or reclaimed if their funds are set up for tax transparency. Over the next 10 years, UK DB pension schemes could add nearly £2.5 billion in assets by adopting tax efficient fund structures for their pooled fund equity investments. Further, they do not have to change their selected asset manager or their investment strategy to do so.”
Meanwhile, Clive Bellows, head of global fund services, Europe, Middle East and Africa at Northern Trust, said: “Now is a timely moment for those overseeing DB pension funds to discuss the tax efficiency of their investments with their advisors and investment managers – and use the withholding tax reclaims or reductions they may be entitled to.”
“Similarly, asset managers that operate or are planning to launch equity-based European funds would do well to consider how the use of a tax transparent fund may benefit their investors. It is now potentially more cost-effective than ever for them to derive the advantages of tax transparency while optimising efficiencies across their fund ranges,” Bellows added.
The research suggested that the large losses are down to DB pension schemes investing via less tax-efficient fund structures than those available.
It revealed that nearly three-quarters (72 percent ) of DB schemes are using fund structures that are tax inefficient, including unit trusts, investment trusts and open-ended investment companies (OEICs).
Additionally, it was found that seven-in-10 (69 percent) of schemes using less-tax-efficient funds admitted they were unaware of the investment income benefits that tax transparent funds have compared to other fund structures.
The research identified that a further 82 percent said that tax efficient fund structures for equity investments were not included in their scheme's risk register.
UK pension schemes, as tax-exempt investors, are entitled to apply for reclaims or reduced withholding tax on dividends from equities under double taxation agreements or domestic tax law provision.
The research indicated that unless they invest via tax transparent funds or insurance policies for their pooled fund investments, DB pension schemes will not be eligible to reclaim any withheld tax paid to foreign governments on their foreign equity holdings.
Elsewhere, the study shows that a total of £56 billion was invested in less tax-efficient funds by UK pension schemes last year.
According to the study, this has led to a lost income of up to £256 million for DB pension schemes last year alone, or nearly £2.5 billion over the next decade.
It was highlighted that this loss could be mitigated if these pooled equity investments were optimised for tax efficiency through the use of a tax transparent fund.
Oliver Jaegemann, CEO of AMX, said: “In the current environment due to the COVID-19 crisis, many pension scheme trustees and their advisors are facing widening funding gaps, scheme sponsors in financial difficulty, and deliberations on re-risking their investment strategies. This is an important time when DB pension schemes should be looking to take advantage of every revenue stream available to them.”
Jaegemann continued: “To miss out on over £250 million in investment income each year seems like an own goal, particularly when the revenue is independent of market movements and can be reduced or reclaimed if their funds are set up for tax transparency. Over the next 10 years, UK DB pension schemes could add nearly £2.5 billion in assets by adopting tax efficient fund structures for their pooled fund equity investments. Further, they do not have to change their selected asset manager or their investment strategy to do so.”
Meanwhile, Clive Bellows, head of global fund services, Europe, Middle East and Africa at Northern Trust, said: “Now is a timely moment for those overseeing DB pension funds to discuss the tax efficiency of their investments with their advisors and investment managers – and use the withholding tax reclaims or reductions they may be entitled to.”
“Similarly, asset managers that operate or are planning to launch equity-based European funds would do well to consider how the use of a tax transparent fund may benefit their investors. It is now potentially more cost-effective than ever for them to derive the advantages of tax transparency while optimising efficiencies across their fund ranges,” Bellows added.
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