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© 2008 Northern Trust Corporation northerntrust.com
N O R T H E R N T R U S T
Aaron OveryHead of Pooling Business DevelopmentEmail: [email protected]
European Pensions Netherlands Summit: The Strive for Excellence
Cross Border Pension Pooling
12 March 2008 - NH Grand Hotel Krasnapolsky, Amsterdam, Netherlands
4
It Simply Comes Down To Performance
“Gain and Retain”
“Pooling is the cheapest and easiest way to achieve superior performance”
5
Vehicle Options - Pooling
Pooling is the aggregation of assets of different entities into a single portfolio
Assets pooled together as a single portfolio.Entities may be within the same client, or of different clients.Pooled portfolio may be a single custody account or, more usually, a vehicle established for pooling purposes. The investment manager can manage a single, large portfolio rather than multiple smaller, separate portfolios.
POOLING
ABC group assets
XYZ group assets
Single Portfolio
6
Vehicle Options – Cross-Border Pension Pooling
Cross-border pension pooling is the aggregation of assets of different pension funds, which are domiciled in different countries, into a single portfolio
Assets of all participants pooled in a single portfolio.Pooling usually takes place within a vehicle.Pension funds may be of different domiciles with different tax rates applicable.Withholding tax will be applied at the rate applicable to the vehicle.System tracks by participant:
Units held
Cross-Border Pension Pooling
Irish Pension
Fund
Pooled Vehicle(Opaque)
NetherlandsPension
Fund
7
Vehicle Options – Tax-Transparent Cross-Border Pension Pooling
Tax-transparent cross-border pooling is the aggregation of assets of different pension funds, which are domiciled in different countries, into a single portfolio where the tax
rate applied is that of the participant and not the vehicle
Assets of all participants pooled in a single portfolio.Pooling usually takes place within a vehicle.Pension funds may be of different domiciles with different tax rates applicable.Withholding tax will be applied at the rate applicable to the Investor. System tracks by participants:
Units heldHoldingsIncomeWithholding taxCapital gains
Tax-Transparent Cross-Border Pension
Pooling
Irish Pension
Fund
NetherlandsPension
Fund
Pooled Vehicle(e.g. CCF/FCP/FGR)
10
UK
Global Equity
Fixed Income
Real Estate
NL Equity
Fonds voor Gemene Rekening (FGR)/Common Contractual Fund (CCF) /
Fonds Commun de Placement (FCP)
Fonds voor Gemene Rekening (FGR)/Common Contractual Fund (CCF) /
Fonds Commun de Placement (FCP)
Participants(Transfer assets in exchange for selected units)
Manager Portfolios(custody accounts)
Private Equity
Sub Funds
Investment Manager
Netherlands Germany Belgium Switzerland
Sweden Ireland Finland
Australia Canada
FGR/CCF/FCP
HedgeFund of Funds
Assets Classes may be in opaque/non Tax-transparent Fund
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
Investment Manager
11
The Pooling Value Proposition - Multinationals
Pooling Value PropositionEnhanced governance and risk management
Administrative efficiencies
Potential cost reductions
Potential Alternatives to PoolingSingle or minimal number of global custodians
Consolidated reporting (HQ Reporting)
Recommended list of investment managers with negotiated fees
IM pooling solution
12
The Pooling Value Proposition – Investment Managers
Pooling Value PropositionTax efficiencies
Enhanced fund performance
Competitive advantage
Potential Alternatives to PoolingNon-tax transparent vehicles (may or may not be characterized by tax drag)
13
IM Structure
Proprietary products
Multi-manager Provide platform/infrastructure so that multinationals do not have to set up their own vehicles but provide manager selection and diversification
Move segregated mandates and pooled funds into new tax-transparent fund run by single investment manager
Guided architecture Implemented consulting, retain control
14
Pooling Today – Timeline
‘01
Consortium formed with two clients Mercer and
GSAM
Northern Trust launches first tax-
transparent multinational CCF
and FCP and global FCP for
manager
Northern Trust launches first
non-tax-transparent cross-
border pension pooling vehicles for multinationals
Ireland creates
CCF
Luxembourg exempts
multinationals from taxe
d’abonnementfor FCP
Ireland extends
CCF eligible investors
and allows non-UCITS
CCF
IMA issues white
paper on pooling
Dutch government promotes the use of FGR
as a tax-transparent
vehicle
EC issues white paper
on investment
funds
‘02
Consortium identifies FCP
as most appropriate tax-
transparent vehicle
Northern Trust undertakes tax, legal and systems work to carry concept
through to implementation
Northern Trust
announces ERISA solution
Northern Trust applies for
patent on tax-transparent
pooling
Operations Management
names Northern Trust’s Univest
launch ‘Best Operations
Innovation’ for 2006
‘03 ‘04 ‘05 ‘06
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Northern Trust’s Innovative Pooling Process
Unique features…Utilizes investors correct tax rate, enabling them to take advantage of tax treaty benefits
Creates accounting records for individual investors using transaction splitting and rebalancing
Reports capital gains and holdings at the investor level
Supports multiple countries/type of investor and multiple countries of investment
Automated withholding tax processing for both relief-at-source and tax reclaim markets
Accurate calculation of capital gains in those markets that require tax transparency for capital gains
Flexibility to provide regulatory and tax reporting where required at the investor level
Supports securities lending for tax-transparent vehicles
Delivering you a broad range of benefits…
© 2008 Northern Trust Corporation northerntrust.com
Tax Considerations
C O R P O R A T E & I N S T I T U T I O N A L S E R V I C E S
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Investment Manager Pooling Dutch Tax Withholding Matrix
Investor type
Danish Pension
Belgian Pension
U.K. Pension 15 %
Dutch dividend tax withholding rate via tax-transparent vehicle
Dutch dividend tax withholding rate via opaque vehicle
15 %
15%
0%
German Pension 15% 0%
0%
0%
*This computation is based on the following general assumptions: asset class consists of DUTCH equities; investor type is pension plan; withholding rate applicable to direct investment by these investors is 0%; withholding rate applicable to foreign investment vehicles is 15%; average dividend yield is 3% or 300bp; tax loss investing in foreign investment vehicle compared to direct investment is 45 bps (15% withholding on 300bp).
Up to 45 bps* in tax drag on Dutch equities can be eliminated by investing via Tax-Transparent vehicles.
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Systems requirements to support tax-transparent pooling
Normally, all investors in a pooled vehicle are subject to the same withholding tax
Tax-transparent vehicles require (for each sub-fund):
Ability to track income by investor
Ability to withhold or reclaim tax at different rates for different investors
Ability to track percentage ownership by investor at any given time
Ability to track “notional ownership” of shares by each investor
Ability to rebalance shares as percentage ownership changes
Ability to support particular requirements of securities lending
Northern Trust built a systems solution specifically designed to meet the tax and legal requirements for tax transparency
19
Will the Dutch FGR emerge as an alternative to the FCP/CCF?
Dutch Ministry of Finance announcement regarding the Fund for Joint Account (Fonds voor GemeneRekening) 27 March 06
Promotes the FGR as a vehicle for cross-border asset pooling
Ministry of Finance confirmed the tax transparency of the FGR in the Netherlands
Ministry of Finance offers to assist in gaining confirmation from tax authorities in other countries that the FGR is tax transparent
Holland Financial Centre
Pensions Champion Document
Requirements for a tax-transparent vehicle for multinational investors
Strong support from regulators in the jurisdiction of the vehicle
Multinational client proposes to establish the vehicle
Gain confirmations of tax transparency from a broad array of countries of investor and countries of investment
Dutch tax authorities willing to provide rulings to confirm tax transparency
Working with Dutch Ministry of Finance to gain additional rulings from other countries
Subsidiaries comfortable with regulatory structure of the vehicle
© 2008 Northern Trust Corporation northerntrust.com
Pan European Pensions
C O R P O R A T E & I N S T I T U T I O N A L S E R V I C E S
25
Taxationaspects
Financial Servicesaspects
−regulated BE−supervised BE−BE solvency rules−assets and liabilities co-mingled
Benefits paid as iffrom IRL plan
Single Fundlocated in BE
IRL tax law
Social and Labour law
Benefits paid as iffrom NL plan
NL tax law
NL social and labour law
Benefits paid as iffrom UK plan
UK tax law
UK social and labour law
IRL social and labour law
Benefits paid as iffrom SE plan
SE tax law
SEsocial and labour law
Taxationaspects
Benefits paid as iffrom DE plan
DE tax law
Social and Labour law
Benefits paid as iffrom BE plan
BE tax law
BE social and labour law
Benefits paid as iffrom CH plan
CH tax law
CH social and labour law
DE social and labour law
Benefits paid as iffrom FI plan
FI tax law
FIsocial and labour law
CH section UK section BE section NL section DE section IRL section FI section SE section
Pan European Pension - EPP
Source: EFRP