Wednesday, September 8, 2010

Consolidation of Pension Fund Management in Oman – Possible Approaches

Pension funds are a key pillar of the financial sector in Oman. As the Sultanate continues its drive to increase the efficiency of government services, it is possible that we shall see initiatives to consolidate the management and operation of Oman’s various pension funds. In this article, we discuss two possible approaches for consolidation of pension fund management: (i) merging existing funds into a single consolidated fund, and (ii) bringing existing funds under a single management body.

The Consolidated Fund Approach

One approach would be to integrate the various existing funds into a single consolidated pension fund, either by way of a corporate restructuring (including through a series of mergers, asset purchases or transfers) or via a wholesale transfer of all the assets held by the existing funds to a master investment holding company or consolidated fund. The consolidated fund would benefit from unified management, administration and support services and could leverage its size to achieve better economies of scale than the smaller existing funds.

However, a corporate restructuring into a single consolidated fund would involve some challenges. Caution and careful planning would be required to capture the benefits of consolidation while avoiding potential legal and administrative issues, including, among others:

  • costs and restrictions relating to the transfer of the existing funds’ assets;
  • valuation issues associated with the broad range of the existing funds’ assets;
  • personnel and service provider decisions, including, most importantly, the selection of the consolidated fund’s managers;
  • tax implications; and
  • variations in beneficiary entitlements under the existing funds.

A consolidation team comprising internal and external stakeholders and independent advisers would be required to address these issues.

The Single Management Body Approach

An alternative approach would involve retaining the existing funds’ respective corporate structures, but delegating management authority over the existing funds to a single management body. This approach could be carried out by way of a series of investment management agreements between the existing funds and the management body, with each such agreement being tailored to satisfy the unique requirements of each fund.

The key advantage to this approach is its ability to centralize the management of the existing funds in a single entity while leaving the existing funds intact, thereby largely avoiding many of the issues associated with asset transfers, valuations, beneficiary entitlements and tax implications. As the single management body would manage multiple portfolios with divergent investment strategies and restrictions, certain measures to avoid conflicts of interest and/or market abuse would need to be taken. We nonetheless would anticipate that this approach would enable the Sultanate to optimise the existing funds’ management and achieve significant economies of scale in a relatively straightforward and cost-efficient manner.

We continue to monitor ongoing developments in the Omani pension fund sector, and look forward to discussing them in the blog going forward.