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Baillie Gifford to shut £10bn pension fund range

Baillie Gifford to shut £10bn pension fund range
Baillie Gifford is closing its £10 billion pension fund range as investor demand for 'life funds' wanes and increasing regulatory costs loom.
The Edinburgh-based fund group stopped accepting new money into the 24 life funds its runs for pension trustees and insurance policy savers in February. 

It will close all the funds over the next 18 months and offer to transfer investors over to equivalent Baillie Gifford retail funds.

A Baillie Gifford spokesman said: 'Following a strategic review, Baillie Gifford has decided to close all of its life company funds and is seeking investor approval to transfer their life company investments to equivalent Oeic funds, managed by Baillie Gifford.

'Investors who transfer their investments will continue to hold a Baillie Gifford pooled fund managed by Baillie Gifford’s experienced investment teams in line with its long-established philosophy and investment approach.'

In some cases, this will involve the launch of new funds run according to the same mandate as the closed funds, while in others investors will be transferred into existing retail funds. Investors will also be given the option of redeeming their holdings.

'Life funds' are available to pension savers through life insurance policies. While Baillie Gifford's range has been available to policyholders with a number of insurers, the majority of money run is on behalf of schemes such as local authority pensions.

The fund group has already launched four retail funds to house the money from the closed funds. 

The biggest of these is Baillie Gifford Long Term Global Growth Investment, which launched in April and already houses £3.2 billion of assets as investors switch across.

While these funds are primarily intended to serve the same investors as its pension fund range, they are also available to a much wider audience through platforms.

That means retail investors are now able to access the investment strategy that has powered top-performing investment trust Scottish Mortgage (SMT) in an open-ended fund.

Baillie Gifford Long Term Global Growth Investment is run by Scottish Mortgage managers James Anderson and Tom Slater, alongside fellow Baillie Gifford partners Mark Urquhart and John MacDougall.

The fund is run along very similar lines to Scottish Mortgage, the top-performing global investment trust over five years, with the shares up 247%, returns that have helped propel the £6.3 billion fund into the FTSE 100.

While a previous open-ended fund offering access to the Long Term Global Growth strategy had been available since 2005, it was reserved for institutional investors and closed alongside launch of the new fund in April.

Other funds launched in recent months include the £932 million Sterling Aggregate Bond and the £423 million UK & Worldwide Equity funds in September, and the £99.5 million UK Equity Focus fund in August.

In accounts for the Baillie Gifford Life company that oversaw the funds being closed, it said the move was a response to tax changes that meant advantages to holding funds of that structure had been eroded. 

The tax advantages of life funds date back to 1997, when in his first Budget as chancellor, Gordon Brown removed the tax credit that pension funds could reclaim on dividends paid by British companies.

This also applied to the distributions from open-ended funds held by pension schemes. However, life companies were still able to reclaim the tax, meaning pension schemes could gain a tax benefit by investing through a life company, using life funds.

Since then, however, the introduction of 'gross of tax' share classes for fixed income open-ended funds and 'tax elective funds' has allowed pension schemes to invest in open-ended funds and receive the same tax treatment as had they invested through a life company.

The plight of Baillie Gifford's life funds business bears that out. In 2015, it had £14.7 billion of assets, but by March this year that had fallen to £9.6 billion, with a large chunk of those outflows due to investors switching from life funds to open-ended funds.

Mounting regulatory costs are also likely to have played a role in the group's move, following the introduction of Solvency II rules for insurers last year.

In 2016 accounts, the life funds business warned 'the outlook remains challenging for the company' and that 'governance, reporting and capital requirements under Solvency II are more onerous'.

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