Jumping Into the (Pension) Pool
It has been suggested that in the near future, real power will be wielded not by nations, but by multinational corporations. While the day when employees consider themselves citizens of Exxon, for example, may not be here yet, multinational corporations—the largest of which maintain operations in 30 countries or more—have a commanding global influence.
Though that may impress shareholders, managing distinct pension plans in dozens of countries is not good for the bottom line. To improve efficiencies, multinationals have been examining ways to pool geographically far-flung assets into a tax-transparent vehicle, offering small pension funds the benefits of superior management and access to diverse products.
Through the Looking Glass
Unilever, a global consumer goods company based in Rotterdam, Netherlands, is among the first to have introduced a solution. It recently launched Univest—a transparent, cross-border pension pooling vehicle. Technically, the fund takes the form of the Luxembourg-based Fonds Commun de Placement (FCP)—one of two so-called "look-through" vehicles for cross-border pension pooling. The other, the Common Contractual Fund (CCF), is based in Dublin, Ireland. The two new look-through vehicles are a major leap forward from the previously used cross-border pooling vehicle—an Irish Unit Trust (IUT), or "look-at" vehicle—because of how the two types of pools are treated by tax authorities, says Kathy Dugan, cross-border pooling product manager for Chicago-based Northern Trust.
Dugan says that look-through vehicles are key to the success of cross-border pension pooling. When U.S. regulators examine the vehicle to determine what or who is to be taxed, she explains, they "look through" the vehicle and see only the end investors. That is crucial, she continues, because individual investors from countries such as the U.K., Switzerland, Canada and the Netherlands do not pay withholding tax on dividends from U.S. equities; however, with previous "look at" vehicles—such as the IUT—U.S. regulators saw only the pooled vehicle, and thus taxed dividends thrown off from U.S. equities held in the pool at prohibitive rates.
Northern Trust—part of the original consortium that studied the feasibility of a look-through vehicle for Unilever—will provide custody and fund administration services to Univest. Other members of the original consortium are Mercer Investment Consulting, Goldman Sachs Asset Management and IBM. Later members include Deloitte & Touche and Clifford Chance.
In total, Univest appointed 14 investment managers with 22 different mandates to run the fund, according to Mark Walker, a principal with London-based Mercer Investment Consulting, which has been contracted to provide manager research, monitoring and fund structure services for Univest. "We have a full set of manager researchers looking at different products that investment managers offer and making assessments about our expectations," he says.
Determining the feasibility of an FCP and CCF for tax-efficient cross-border pension asset pooling was a long process, acknowledges Northern Trust's Dugan, whose team sought tax rulings from dozens of local authorities around the world. "We started that work four years ago so, from a legal and tax perspective, we have a substantial lead [on the competition]," she says. "If you are behind from a systems perspective, you can speed up, but to speed up from a tax and legal perspective is really tough."
TowerGroup senior analyst Peter Delano also asserts that the main challenges of competing in the space are not technological. "The platforms the major custodians have in place will be able to support this business," he says. "The major challenges of implementation are more in the relationships between the pension funds and the local boards of trustees for each of these countries."
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