Pooling pension fund assets into fewer, larger funds will not necessarily improve investment performance, according to the UK’s asset management trade body.
In its response to the Financial Conduct Authority’s (FCA) asset management review, the Investment Association (IA) said it was “not axiomatic that performance, and ultimately funding… will be improved” through greater consolidation.
Citing data from the Pension Protection Fund (PPF), the IA noted that there was “no clear relationship between scheme size and funding level”.
On a PPF basis, schemes with fewer than 100 members were 93% funded at the end of March 2016, according to the lifeboat fund’s annual report, while those with 1,000 to 5,000 members were 82% funded. Schemes with 10,000 members or more were on average 87% funded.
The IA said in its report: “No evidence has been presented to suggest that increased scale alone will lead to better asset allocation decisions, a highly significant driver of returns for any investor.”
Instead, the “key driver” of improvements for pension schemes was “enhanced investment governance”, the association argued.
The UK’s local government pension scheme (LGPS) is undergoing a radical structural overhaul, involving the consolidation of assets into a small number of large asset pools. One of the most advanced, the London Collective Investment Vehicle, was cited by the FCA as an example of how pooling could help reduce costs.
The IA agreed that consolidation would help improve competition for mandates, but argued that it was “unclear” whether the cost savings claimed by the LGPS pools could be replicated in other arrangements.
“We think that some caution is justified here with a recognition that pooling on its own is unlikely to be a panacea,” the association said.
“The LGPS experience is arguably a singular one due to the greater homogeneity in benefit structure (resulting in a degree of homogeneity in liability profiles) and the fact that the public sector ultimately underwrites these schemes.
“The challenges of pooling corporate defined benefit schemes are likely to be greater, with different strengths of employer covenants and differences in benefit and liability structures.”
The FCA’s review of the asset management sector leveled a number of criticisms at the industry, including a lack of transparency and “weak” price competition, particularly in the retail investment sector.
In response, the Investment Association said the “direction of travel” for pricing was “not compatible, in our view, with a finding of weak price competition”. Following the introduction of new rules in 2013, known as the “retail distribution review”, which stripped out commission payments to distributors, the IA claimed pricing had become more transparent and competitive.
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