UK DB Pension Schemes Lose up to £250m a Year Due to Use of Less Tax-efficient Funds, Research by AMX and Northern Trust Reveals

UK defined benefit (DB) pension schemes are losing out on over £250m of additional income per year in their global equity portfolios because they are investing via less tax-efficient fund structures than those available, according to new research from The Asset Management Exchange (AMX) and Northern Trust (Nasdaq: NTRS), conducted by Broadridge Financial Solutions.

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. However, 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.

The study shows that a total of £56bn was invested in less tax-efficient funds by UK pension schemes in 2019. This has led to lost income of up to £256m for DB pension schemes last year alone, or nearly £2.5bn over the next decade – a loss that could be mitigated if these pooled equity investments were optimised for tax efficiency through 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.

“To miss out on over £250m 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 £2.5bn 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.”

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."

The survey of 120 UK DB Pension schemes reveals that nearly three-quarters (72%) of DB schemes are using fund structures that are tax inefficient, including Unit Trusts, Investment Trusts and Open-Ended Investment Companies (OEICs).

Furthermore, 7-in-10 (69%) 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, and 82% said that tax efficient fund structures for equity investments was not included in their scheme's risk register.

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About The Asset Management Exchange

AMX centralises, standardises and streamlines the process of investing, making implementation and monitoring more efficient through:

• Reduced duplication of cost, resource and time
• Economies of scale in relationships with other service providers, such as market counterparties, custodians, clearers and prime brokers
• Standardised legal documentation
• Timelier and more accurate reporting through centralised data
• Reduced complexity via standardised infrastructure and a centralised back office.

AMX secures better pricing because of the buying power of the exchange by centralising operating costs, such as custody and administration at the exchange, thereby lowering operating expenses.

AMX also offers enhanced control for investors via an independent risk oversight function and single portfolio interface to centralise and standardise compliance, minimising distractions from the core investment function while providing greater investor confidence.

The Asset Management Exchange (“AMX”) is an institutional platform that gives investors and asset managers a way to do business with each other. Built with a fund infrastructure that’s designed for the needs of institutional investors, AMX standardises, centralises and streamlines the entire process of investing so it works better for everyone.

Established by Willis Towers Watson in 2017, AMX negotiates with managers, transitions assets, provides reporting and adds an extra layer of oversight. The platform is open to all investors and managers across the investment industry.

For more information go to theAMX.com or @TheAMXchange.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2020, Northern Trust had assets under custody/administration of US $10.9 trillion, and assets under management of US $1.1 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/united-states/terms-and-conditions.

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