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FCA to government: Remove barriers to scheme consolidation

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The UK regulator has called for the government to remove barriers to pension scheme pooling in a bid to improve governance and transparency.

The Financial Conduct Authority (FCA) made the recommendation today as part of its Asset Management Market Study. It said the Department for Work and Pensions (DWP) should seek to remove regulatory and perceptual limits on consolidation.

The regulator said: “For DB schemes, we agree that some schemes might be able to benefit from pooling through lower fees and wider choice. However, there are barriers to DB pension scheme pooling, in relation to complex rules concerning changes to existing benefit structures as well as the responsibilities on trustees and sponsors and certification requirements…

“We have found that removing some of these barriers could encourage the practice of asset pooling, allowing smaller pension schemes to benefit from economies of scale and exert greater pressure on asset managers. This would require changes to legislation and the issuing of further guidance to trustees.”

The FCA also recognised existing opportunities for pooling, including the DWP’s ongoing work on merging defined contribution schemes. Some respondents to the regulator’s interim report, released in November, highlighted fiduciary management as one method of pooling assets.

The regulator said it would not make consolidation mandatory due to complexities and existing work being undertaken by the DWP and other parties.

The Pensions and Lifetime Savings Association (PLSA) welcomed the regulator’s stance. The pension sector trade body has been seeking support for consolidation for several months, and has suggested the creation of “superfunds” to pool resources for smaller schemes.

Graham Vidler, director of external affairs at the PLSA, said the FCA’s report reflected work undertaken by the trade body’s Defined Benefit Taskforce, which proposed the superfunds idea.

Vidler added: “We also believe that common governance arrangements, where schemes are brought under the supervision of fewer but more experienced trustees, could also mean schemes are better able to scrutinize and hold their asset managers to account.”

However, others have warned that consolidation should not be seen as the only way forward for pension schemes.

Dan Mikulskis, head of defined benefit pensions at Redington, said: “The industry can do a lot without needing consolidation. There are plenty of ways in which schemes can get fully funded without the need for consolidation. It would be wrong to think of it as a panacea.”

Earlier this year, the Investment Association stated in its response to the FCA that “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”.

Enhanced governance was also important, the asset management trade body said. The FCA also sought to address in its market study, recommending more independent board members at fund management companies and an expansion of the Senior Managers Regime to increase individual accountability.

The Asset Management Market Study is available here.

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