Northern Trust in Patent Bid for Cross-Border Pension Pools
February 26, 2007
The filing with the U.S. Patent and Trademark Office, one of the latest of numerous and at times controversial patents to come to light in financial industry business methods and processes, was made in August 2005. Northern Trust disclosed it only this month, citing its "imminent publication." The Chicago-based bank has also filed a request under the Patent Cooperation Treaty, which would give it a "passport" for quick approval in over 100 other countries.
Business-method patents like this have accelerated since a 1998 court case paved the way for a State Street Corp. patent on the "hub and spoke" approach to mutual fund management. A year ago, Bank of New York Co. reported getting a U.K. patent and made a U.S. filing for "a two-way electronic messaging interface model that facilitates communication between investment managers and custodian banks" (Securities Industry News, Jan. 23, 2006).
In its filing, Northern Trust describes what it says are innovations in fund administration, custody and securities lending that will allow multinational corporations and investment managers to pool pension assets from multiple country plans to achieve efficient management and appropriate risk control while taking advantage of favorable tax treaties. "The methods and systems" will allow for income to be taxed separately and according to the investor's tax treaties, along with transaction splitting and rebalancing, investor-level tracking for capital gains and holdings reporting, and a blended tax rate for securities lending transactions, the custody bank said.
"We felt the time and
effort of our staff in creating the appropriate technology to
support tax-transparent vehicles were worth this level of
protection," said Kathleen Dugan, senior product manager for
pooling at Northern Trust. "Patenting our methods that enable
Northern Trust's successful, tax-transparent, cross-border pooling
solution will strengthen the market-leading position we have
achieved."
Dugan declined to predict when Northern would obtain the patent office's approval. She said Northern is the only custodian bank that handles pooled pension funds created by multinationals "with investors in multiple markets and investments in multiple markets." Competitors, she said, are either servicing pooled pension funds promoted by investment managers, or "less comprehensive" multinational pension plans.
Various Firsts
State Street confirmed that it was the first custodian bank, in 2004, to win a mandate for a pooled pension fund account sponsored by an investment manager--Deutsche Asset Management. Northern serviced the first pooled pension fund vehicles for multinationals in 2002. But those relied on a global bond strategy and on Irish unit trust legislation that did not allow for tax transparency. In 2005, Northern won the first multinational pooled pension fund accounts, which included equity investments based on new regulations in Ireland and Luxembourg. So far, Northern has garnered $10 billion in tax-transparent, cross-border pooled accounts, representing six clients. Of the clients, three are multinational companies--including Unilever--and three are investment managers.
Multinationals have long contemplated having an investment vehicle that would consolidate pan-regional or global pension management in a single fund. Custodian banks estimate that could save upward of 30 basis points a year in administrative costs alone. Setting up and maintaining multiple pension plans across a range of jurisdictions, each subject to indigenous regulations and requiring local personnel, poses operational and tax challenges.
