The European Commission’s plans to implement a financial transaction tax – which will include a 0.1 per cent levy for trades in stocks and bonds – could force investment managers to rebalance their portfolios, negatively impacting returns for some pension funds, warn experts.
Investment professionals say the proposals, which have been met with opposition from countries such as the UK and Sweden, could have a number of unintended consequences, particularly for the repo market.
“The application of the EU FTT could result in investment managers looking to rebalance their portfolios to avoid its impact,” said Mark Persoff, financial services tax partner at Ernst & Young. “Market noise suggests this may have already happened to an extent following the introduction of financial transaction taxes in France and Italy.”
Stuart Catt, senior associate at Mercer, added that there were likely to be a number of issues for pension funds with a decline in funds using repos as a way of managing risk as part of their liability management.
Repo transactions allow investors to borrow cash for a short period from another party, using securities as collateral for the loan.
Costs will be too prohibitive, he said. “[The FTT] will make it much more difficult to justify using [repos], rather than a different exposure, be that a derivative or a fiscal security,” said Mr Catt.
A spokesperson for the commission said pension funds were important players within financial markets, and to exclude them from the tax could create competitive distortions.
“The impact of the proposed FTT will depend on the portfolio and the investment strategy. Buy and hold strategies will feel very little impact from the FTT, whereas the more aggressively managed pension funds will be taxed more,” added the spokesperson.
However, it is also anticipated the problems could stretch wider than Europe, with a recent survey by PwC of heads of tax at global companies highlighting anxieties.
Nearly three quarters – out of 43 heads of tax surveyed – said the FTT would have a “significant” impact on their business, while two-thirds said they had conducted some form of impact study on the matter.
Alex van der Velden, partner and chief investment officer at Amsterdam-based asset management firm Ownership Capital, and former head of responsible equity strategies at Dutch pension fund PGGM, said it was definitely an international issue.
Asset owners in the US and elsewhere would have to pay tax if conducting transactions with a counterparty in Europe, he said.
“Given the size of the market in the European Union and the amount of foreign investment here, this has the potential to become a real issue for the continent’s competitiveness on a global level,” said Mr van der Velden.