Tobin tax could increase pension funds' FX costs by 1,500% – report

EUROPE – Pension funds could see foreign-exchange transaction costs soar by as much as 1,500% if Brussels decides to push ahead with plans to introduce a controversial financial transaction tax (FTT), one association has claimed.  

According to new figures released by the Global FX Division (GFXD) of the Global Financial Markets Association, the FTT could increase FX transaction costs by 300-700% for corporates and as much as 1,500% for pension funds.  

The GFXD warned that, even when discounting FX spot transactions from the FTT, a tax on FX forwards, swaps, options and non-deliverable forwards would be enough to dissuade companies and investors from international trade and investing.

James Kemp, managing director at the GFXD, said: “The FX market is highly transparent, highly liquid and underpins international commerce and investment by providing corporates and fund managers with an efficient way of carrying out their business.

“The proposed tax risks becoming a disincentive for businesses to hedge risk, which could increase their earnings volatility and business risk.”

The GFXD pointed out that a pension fund manager investing globally had multiple cash flows in different currencies in various pension portfolios.

The association said the fund manager would need to be able to convert all these currency flows into a single balance on a weekly basis, undertaking FX transactions to meet liabilities in different currencies.

It said an FTT would impact these funds severely due to the tax’s “double-sided nature”, and that pension funds could see transaction costs rise by around 1,500% and even “by as much as 4,700% in some cases”.

A pensions industry accustomed to annual transaction tax costs of approximately €1.2m could see costs jump to more than €57.6m a year, were the FTT implemented, it said.

“The effect of the proposed tax on pension funds is even worse than on corporates, as it will be taxed on both sides,” Kemp said.

“The result will be reduced fund performance to the detriment of institutional and individual investors.”