DENMARK - Denmark is likely to see a wave of mergers between pension funds in the next few years as smaller players jostle to cut costs, according to officials at Denmark's giant ATP pension fund.

Lars Rohde, chief executive of ATP, told IPE "the pensions business is characterised by economies of scale, and they are huge", adding:

"There will be pressure in the future to find ways of harnessing those scale advantages, and there will be pressure from members to reduce costs by merging over the years to come. I expect to see (more mergers) in the future," said Rohde.

Schemes could cut costs by outsourcing, but only by so much, he suggests, so the likely move by pension funds is to merge and consolidate with others, to begin building a bigger position in the market.

"That is of course a way of taking some of the advantages of scale, but to grasp the full efficiency one has to admit that really large entities are the way to go," said Rohde.

Danish pension funds PNN Pension and PHI - which have 56,000 members between them - announced last week they were considering merging with the much larger Industriens Pension, citing their desire to keep returns high and costs low.

Rohde commented there is more to be gained from mergers than cost reductions.

"There is the cost issue, but another very important part of it is simply about competencies. If you are a large scheme you can attract and retain people in a much better way, so that is a more indirect way of having lower costs with higher efficiency.

"You can say there are huge scale advantages on the administration side, but it's most likely the scale advantages are higher on the investment side, topped off by this competency question.

"These small schemes - even when they outsource to their asset managers - will find they have higher costs. It is much cheaper for a €10bn scheme to outsource than it is for a €1bn scheme to do so," he added.

When talking about smaller schemes, Rohde is referring to most of the Danish pension market as he describes them as having less than 100,000 members and assets under management of less than €5-10bn.

The Danish Competition Commission also said in its annual report many small labour-market pension institutions would probably only be able to reduce their administration costs for members if the schemes outsourced their processes or merged.

"The Commission has highlighted some of the basic questions and I think it increases the pressure," Rohde responded.

"It will highlight the need for transparency and the need for trustees or board members to look into these questions."

However, he suggested being completely transparent about their costs was not straightforward for pension schemes, which in turn is part of the problem.

"It is not that easy to calculate the total costs [of pension schemes]. Some costs were contained in the collective bonus potential, and some returns were calculated net of costs," said Rohde.