Matching assets

Pamela Reid goes through the different considerations that need to be taken into account when using QROPS

QROPS (Qualifying Recognised Overseas Pension Schemes) are a type of pension fund and carry the same challenges for investment as any other pension fund (such as balancing risk and return and coping with cash coming either into the fund through contributions) being transferred or being paid out as a pension. What makes these different is that the member is most likely to be resident abroad and needs income in their new home currency. Matching this to the assets is what makes this a different remit for a UK based investment manager.

If the member has moved to Europe, investing into Euro assets would reduce the currency risk of the fund and ensure income payments are not devalued when sterling weakens. If this position is not familiar to the investment manager, there is a need to build a model to suit the circumstances and then select a benchmark to assess performance. These benchmarks are generally not available off the shelf and will need both technology and knowledge to build them. Having some idea of the past performance of the asset allocation selected and the correlation of the asset classes used, is all part of this process.

World markets

For an investor who is familiar with the UK approach, it is a big shift to start looking at equities on a world market as the balance of the world markets is very different to that seen in most UK based portfolios. The FTSE World Index, for example, is based on 2,700 world companies and reflects the relative size of the different world markets. With 43% in the US, 21.3% in Europe and just 9% in the UK, this has a very different make up to the normal range of investment in a UK based portfolio. Making sure that the investor understands this, is all part of the investment management role.

Continental portfolios generally hold higher levels of fixed interest than their UK counterparts. There is the question whether the investor will want to reflect their new neighbour’s asset allocations or reflect one that he may be more familiar with. Obtaining the details and research is another demand on the investment manager’s time.

There then comes the issue of selecting the funds. Many of the Euro or Dollar denominated funds are not as familiar to a UK adviser as their Sterling counterparts and, in some cases, access to these could be limited. An investment manager would need to show their credentials and experience in dealing in this market and have knowledge of both collective and non collective investments.

Multi-currency reporting may also be required. The trustees or administrator based in Guernsey or the Isle of Man would need to see reporting in sterling, while the member may be more interested in the Euro or Dollar value. Payments to the administrator may need to be made in foreign currency. Therefore, any firm dealing with this should have experience of multi-currency dealing.

UK residents

Although QROPS are aimed at those living abroad or moving from the UK, there is a tax issue if the member remains a UK resident which means greater consideration needs to be taken on the selection of investments. As these pension funds are not covered by the exemption of UK pension funds on UK income tax, they are potentially subject to income tax on UK investments at the rate applicable to trusts. This is an uncomfortable 40% rate rising to 50% (42.5% for dividends) next April, chargeable to the fund. The consideration is to invest in non UK situs investments (i.e. those registered offshore) which restricts the range of investments. Holding direct UK equities and fixed interest stocks is possible but the dividend income will suffer additional tax. Holding an offshore collective resolves this problem. Even if a QROPS is mainly being used because of its tax benefits, the client’s financial situation, the suitability of the investment and its context in terms of the client’s total portfolio must be taken fully into account.

Using an offshore bond within these pensions is also a possibility. This eliminates the additional problem of the income tax issues for UK investments with a UK resident member, but they do not come cheaply. You are paying for two products where one will do. Using these solely on the basis of the investment issues, when there is a more straightforward route, needs careful thought. The fund range would be more familiar to a UK investment manager.

For QROPs, the requirement of overseas investment management comes to the fore and needs to be part of the capability of the investment manager that is selected. Knowing and understanding both this market and the trust law that backs QROPS is as important as the consideration to use a QROPS in the first place.