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Financial Times: Pension pooling: a con, or for pros?

EXTRACT: Unilever is among the big multinational schemes that have already carried out pooling. Shell and Nestlé are also believed to be looking at it.

By Kalpana Fitzpatrick
Published: June 4 2007 03:00 | Last updated: June 4 2007 03:00

Cross-border pension pooling has been a hot topic for a couple of years but only a few schemes have so far taken the plunge.

The concept of cross-border pooling, which involves combining the assets into a single collective investment fund or pension fund, is still in its infancy and there appears to be a lack of understanding and a great deal of complexity attached to it.

However, economies of scale can be realised via pooling, and although pension funds have been slow to respond, fund managers are starting to take steps into the arena.

Aaron Overy, pooling consultant at Northern Trust, says large-to-medium pension funds that have the time and resources to consider pooling are looking at it. “However, smaller pension funds are likely to go into pooling vehicles set up by fund managers,” he adds.

“What we are seeing is that investment managers are getting involved and are looking at tax transparent vehicles by either converting or creating new platforms. They are increasingly using multi-manager strategies.

“If they [investment managers] are setting up pooled funds, for example in Dublin or Luxembourg, for pension funds, then this enables them to remove a significant tax drag, by moving to a tax-transparent structure.”

The European Commission recently released draft regulation on improvement to the single European Union market framework for investment funds, which stated that the development of cross-border virtual pooling is suffering from a lack of common understanding among regulators.

Mr Overy says that his discussions with clients show that entity pooling has strong support, but that virtual pooling is not an option for all.

He adds that cross-border pooling could result in savings, and argues that some multinationals and fund managers are still not aware of the perceived benefits.

Some of the main benefits of pooling include reduced costs, the negotiation of lower custody fees, lower transaction costs, optimised risk management, greater flexibility and lower administration costs.

Despite the benefits, however, there are currently few operators in the market that provide a cross-border pooling platform.

From a custodian perspective, Northern Trust is one of the few that offer pooling capabilities and other custodians are slowly lining up to enter the market.

Earlier this year, Kas Bank said it would be looking to offer international pooling and will be developing this as part of its business plan for 2007.

However, the optimism is not shared by all. Mark Berwick, managing director at Bank of New York, argues that despite the hype about pooling, he does not believe there is demand.

“There is a lot of noise about cross-border multinational pooling, but we have not seen the demand. There are many unknowns about pooling. It also needs a lot of time and attention, and a lot of schemes don’t have resources.”

He adds that virtual pooling could help tax and regulation issues, but UK schemes are not really going into it.

However, Mr Berwick says he does not rule out pooling as a business opportunity and although BoNY has no official cross-border pooling platform on board, it has capabilities. With its recent merger with Mellon Financial Corporation, he says, the bank may well offer more in the future.

“If Mellon has a solution, then we will be making this available to our clients. It [pooling] is something we hear a lot about, but we haven’t seen a lot of action and I question if there is actually demand for it.”

He adds: “Dealing with multinational pooling can be complicated, more so than dealing with individual schemes, and this could compromise economies of scale.”

Unilever is among the big multinational schemes that have already carried out pooling. Shell and Nestlé are also believed to be looking at it.

Some UK fund managers believe that although pooling is complicated, there are benefits for investment managers as they already manage a number of non-UK domiciled pension funds.

The Investment Management Association in the UK agrees that pooling could create a cost efficient industry, but more work needs to be done before it becomes common practice among fund managers and investment funds.

The idea is that pooling would make schemes and investment funds more efficient and make savings along the way, but tax complexities and lack of understanding is hindering progress.

But experts argue that this will change as more platforms become available and more operators look to build their business on the opportunities cross-border pooling can provide.

Copyright The Financial Times Limited 2007

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