DENMARK - Growing pressure on pension funds to take advantage of economies of scale, particularly in the current financial climate, could lead to the end of smaller company pension funds, the chief executive of ATP has predicted.
Lars Rohde - one of 12 nominees for this year's Outstanding Industry Contribution award at the IPE European Pension Fund Awards presented in Barcelona last night - said a regulatory framework built on mark-to-market pricing had given a boost to innovation and in general "triggered a broad development where people use more sophisticated financial instruments".
However, he said: "It has become more and more obvious on a global scale that pensions are a scale business. The economies of scale are so huge that in the years to come, in fact it has already started, we will see a lot of mergers in the pension industry.
"It is simply more expensive per unit to have a smaller pension fund than a larger one. There is growing pressure to have structural reforms and shifts to have bigger funds. The smaller company pension funds are becoming a thing of the past," he added.
Rohde pointed out pension funds are struggling to fulfil the pension promise as a result of falling reserves and increasing longevity, but because pensioners want a secure, safe and predictable income and the sponsor wants contributions or accumulated costs to be as little as possible, the question, he argued, is "how can we integrate these two starting points? It is no easy call."
He claimed one solution could be to "redesign the whole distribution of risk between the sponsor, individual and society".
This is already happening in some countries, as in Denmark "it is very easy to de-risk the plan by taking out the guarantees for he pension product" so that all the investment risk is transferred to the individual, while in the UK there is a trend of switching from defined benefit (DB) schemes to defined contribution (DC).
"We see this on a global scale. But at the end of the day is it in the interests of the individuals? Are they equipped to decide on the risk? I very much have my doubts," said Rohde.
Instead, he highlighted ATP's use of a 'hedgeable' pension product that "takes all the unrewarded risk out of the equation", in particular interest rate risk, and allows a fund the flexibility to only take well-rewarded risks, making it a "brand new ball game".
Rohde said with this product ATP is able to "offer a secure and guaranteed pension, which is exactly what members want, but we don't have the risk on our balance sheet either as we've hedged it out".
He admitted: "We have been the ones that have adopted this approach in the most radical way, although we have seen changes in products and the way people have been defining pensions. It is fair to say there have been similar developments along the same lines in some countries at least."
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