DB schemes losing around £250m a year to tax-inefficient investments

UK defined benefit (DB) pension schemes are losing out on around £250m of extra annual income in their global equity portfolios because of tax inefficiency, according to new research from The Asset Management Exchange (AMX) and Northern Trust (NT).

The research, conducted by Broadridge Financial Solutions, found that a total of £56bn was invested in less tax-efficient funds by UK pension schemes in 2019, leading to lost income of up to £256m for DB pension schemes last year alone.

It stated that this loss could be mitigated if these pooled equity investments were optimised for tax efficiency through use of a tax transparent fund.

AMX and NT explained that DB schemes are not be eligible to reclaim any withheld tax paid to foreign governments on their foreign equity holdings unless they invest via tax transparent funds or insurance policies for their pooled fund investments.

AMX CEO, Oliver Jaegemann, 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.”

He stated that missing out on £250m-worth of investment income per year seemed like an “own goal”, adding that schemes would not even need to change their selected asset manager or investment strategy to adopt “tax efficient fund structures for their pooled fund equity investments”.

Northern Trust head of global fund services – Europe, Middle East and Africa, Clive Bellows, added: “Now is a timely moment for those overseeing DB pension funds to discuss the tax efficiency of their investments with their advisers 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.”

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