There is an increasing amount of interest in the establishment of pension pooling vehicles by multinational organisations seeking to combine their international or European pension investments in a single global or single regional fund. The pooling of pension assets in a single vehicle is an attractive concept as it generates economies of scale, which in turn are expected to reduce costs, and improve the ultimate performance of the pension funds.
However, the possibility of creating a single cross border pension plan within the EU is still a long way off, not least because of a lack of harmonisation of social, labour and taxation laws and regulatory regimes in the employee/EU member countries.
Pension asset pooling is therefore considered to be the next best option. In addition to economies of scale (reduction in transaction costs, asset management fees, custodian, tax and audit fees) and improvement in fund performance, pooling can also provide enhanced governance and risk management as a result of greater consistency in the management of the pension plans and improved oversight, including:
q Greater consistency in management selection and centralised co-ordination of all pension plans;
q Manager diversification;
q Consistent investment strategy across all of a multinational organisation’s pension plans;
q Enhanced reporting from one global custodian.
Pension asset pooling may also allow smaller pension funds that would otherwise fail minimum investment requirements to access managers that have minimum investment limits, and as a result of the centralised management selection process all pension funds in the pooling vehicle may have greater access to boutique/alternative managers.

Pension asset pooling is achieved by having local in-country pension plans invest in a single vehicle (ie, the pension asset pooling vehicle), which in turn holds the underlying investments on behalf of the pension plans.
In many countries, local pension plans benefit from concessional tax treatment such as:
q Income derived by the pension fund being tax exempt;
q Income derived by the pension fund being taxed at concessional tax rates;
q Foreign dividends and interest received by the pension fund are either not subject to withholding tax under the terms of a particular double tax treaty (DTT) or are entitled to a reduced rate of withholding tax.
Therefore, in choosing an appropriate pension pooling vehicle, it is essential that the pension plan is not disadvantaged, from a tax perspective, by investing assets indirectly via a pension asset pooling vehicle rather than directly (ie, that it does not suffer a loss of tax concessions or suffer double taxation). In practice, the tax attributes of the pension pooling vehicle are critical to making pension asset pooling work.
The key tax attributes for the pension pooling vehicle are that:
q The pension asset pooling vehicle is not subject to tax;
q There is no local withholding tax on payments of dividends or interest from the pension asset pooling
vehicle.
In addition, the pension fund investors must still be able to access zero or reduced rates of withholding tax in respect of dividends and interests received by the pension fund pooling vehicle.
However, there is no corporate entity which currently meets all these tax requirements as corporate entities that are themselves exempt from tax are generally not able to benefit from reduced withholding tax rates under double tax treaties, and certainly would not be able to access the zero withholding tax rate available to pension funds under some double tax treaties.
Therefore, in order to preserve a pension fund’s tax benefits, the pension pooling vehicle must be a ‘flow-through’ vehicle which is not subject to tax in its local jurisdiction and which does not suffer any withholding tax on distributions to investors. This means that in order for the pension fund investors to access zero or reduced withholding tax rates under DTT, it is essential that the pooling vehicle is regarded as ‘tax transparent’ by:
q The tax authorities in the country of residence of the pension pooling
vehicle;
q The tax authorities in the country of residence of the pension plan;
q The tax authorities in the country where the investments are located or which imposes the withholding taxes.
This will ensure that when applying the terms of the relevant DTT, the pension fund investor will be treated as investing directly in the underlying assets and the pension asset pooling vehicle will, effectively, be ignored. The diagram below illustrates the typical pension asset pooling vehicle structure.
A key consideration for any pension fund contemplating investing into a pooling vehicle is to confirm the tax transparency status of the vehicle as outlined above.
The Luxembourg Fond Commun de Placement (FCP) and the Irish common contractual fund (CCF) are two pooling vehicles that are currently being used as pension asset pooling vehicles. The FCP has been in existence for many years and the tax authorities of many countries have confirmed in rulings, or clarified in other statements the tax transparent treatment of the FCP. More recently a number of tax authorities have also confirmed the tax transparency status of the CCF; to date PricewaterhouseCoopers Ireland has obtained rulings from seven foreign tax authorities confirming the transparency of the CCF.

The two key tax challenges facing pension asset pooling are ensuring that the pooling vehicle is treated as tax transparent in all relevant jurisdictions and the administrative issues associated with claiming relief from withholding tax on dividends or interest under DTT or obtaining remittance of tax withheld.
For example, consider the above illustration where pension funds A and B are resident in tax treaty countries (zero dividend WHT under the treaty applicable to pension fund A, 15% dividend WHT under the treaty applicable to pension fund B) and the pension asset pooling vehicle invests in shares in country X. The key question is whether the tax authorities of country X will apply the reduced/zero rate of WHT on dividends paid to pension funds A and B, or whether they will apply the 30% dividend WHT rate on the basis that:
q The pension asset pooling vehicle is not regarded as tax transparent in country X and therefore pension funds A and B are not entitled to treaty relief;
q Pension funds A and B are entitled to treaty relief but the tax authorities of country X have no evidence of this.
Typically, tax authorities require each investor to provide evidence that they are entitled to relief under a DTT (this often takes the form of a tax certificate provided by the pension fund’s local tax authority). This requirement obviously creates significant administrative problems if each pension fund investor in the pooling vehicle has to provide tax residence certificates and file appropriate WHT reclaim forms for each underlying investment of the pooling vehicle. Many tax authorities are aware of this issue but in most instances, pension pooling vehicles and pension funds have to negotiate and agree simplified filing/identification procedures with the relevant tax authorities. This remains one of the key administrative challenges to pension asset pooling.
Other key challenges surrounding the implementation of pension fund pooling include:
q Costs – the implementation of a pension asset pool can be very costly as each solution must be tailored to the specific circumstances and requirements of the pension funds involved;
q Technology – systems designed and able to deal with the complexities of consolidating the multiple pension plans are currently being developed;
q Administration – educating tax authorities and agreeing with them on the tax transparent treatment of the pension asset pooling vehicle.
Pension asset pooling is still in its infancy and is currently a tailored product. Many of the key challenges will require specific solutions depending on the location of the underlying assets and the pension plans. However, there are promising signs that these challenges can be resolved with time as a result of more experience in creating and operating pension asset pooling vehicles.
Elizabeth Stone and Friederike Werner are senior managers at PricewaterhouseCoopers Investment Management Tax practice

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