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 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, conducted by Broadridge Financial Solutions.

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“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. ”

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.

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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.”

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