DB schemes lose £250 million on tax inefficient investments

UK defined benefit (DB) pension schemes are losing out on over £250 million of additional income per year in their global equity portfolios because they are investing via fund structures less tax efficient than are available, according to joint research from the Asset Management Exchange and Northern Trust.

The study found that a total of £56 billion was invested in less tax-efficient funds by UK pension schemes in 2019. This has led to lost income of up to £256 million for DB pension schemes last year alone, or nearly £2.5 billion over the next decade.

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.

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 advisers and investment managers – and use the withholding tax reclaims or reductions they may be entitled to.”

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, Bellows said.

“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,” he added.