Companies are looking at any structure that boosts returns on pension investments as they come under re-newed downward pressure. Martin Campbell of Northern Trust bank examines how to exploit tax benefits on pooled pension products pointing out that this technique can bring huge financial benefits.

Many pension funds opt to invest via pooled funds offered by investment managers for reasons of costs, ease of access and scale. However, an analysis of the impact of using a tax-transparent pooled vehicle on a £1 billion investment in a MSCI Euro index fund highlights the importance of tax efficient investing.

A UK corporate pension investor who invested this amount in 1997 via a tax-transparent Irish Common Contractual Fund (CCF) would have earned an additional £57.5 million over 10 years when compared to the same investment via an Irish Variable Capital Company (VCC), which is "look at" rather than "look through" for tax purposes. Of course, the CCF was not introduced until 2003 so it would not have been possible to replicate this in reality but these results are still intriguing. The £57.5 million figure is based on a fund manager performing the same as the index. If they outperform, the numbers are even better. Before expanding any further on the financial model which has been used to derive this figure, an explanation of why these additional earnings are possible is required.

An important consideration when pooling equity investments is the withholding taxes paid on dividends. Double taxation treaties between countries spell out the withholding tax rates applicable to certain investor types when investing in the securities of issuers from those countries. For example, the agreements between the United Kingdom and several countries including Belgium, the Netherlands and Ireland offer zero withholding tax rates for UK pension plans. Thus, UK pension plans that invest directly pay no withholding tax when receiving dividends from securities located within this network.