Funds have made great strides in the quality of these systems over the last 3 to 5 years, with many lessons learnt during the global financial crisis and the market volatility that followed.
Nonetheless, the accuracy of funds’ unit pricing systems still depends on the nature of investments held, the diversity of asset classes / options offered, and the information available from funds’ custodians.
As the actual tax payable by investment options may not be calculable on a real time basis, systems will generally rely on setting an effective tax rate for each investment option, with periodic reviews (and potential true-up adjustments) comparing the tax accrual in unit pricing systems with funds’ actual tax experience.
Under this approach, it is critical to distinguish between differences due to:
- market factors differing from those in the assumptions underpinning the effective tax rates
- other factors.
Factors that may require special consideration before adjusting unit prices include:
- the effect of large switches between investment options during the period
- amalgamations of investment options (with mergers of funds being special cases)
- splitting a single investment option into two or more options.
In addition, factors that may require changes to effective tax rates include:
- introduction of new investment options or asset classes
- changes in strategic asset allocation for particular options
- changes in the quantum of tax paid investments such as PSTs.
Wherever these or other unusual events occur, funds need to take great care, as following standard procedures without taking into account these circumstances may actually lead to unit pricing errors and rectification costs.