The UK’s Financial Conduct Authority (FCA) wants to see whether UK private sector occupational pension schemes could pool assets more effectively as a potential means of enabling them to extract better value for money from asset managers.
On Friday, the regulator published the interim report on its study into the asset management market, saying it found evidence suggesting “there is weak price competition in a number of areas of the asset management industry”.
The FCA has proposed a set of potential fixes for the problems it has found, one of which includes exploring the potential benefits of greater pooling of pension scheme assets.
This is work it envisages doing with the government.
It is asking for feedback on the “remedies” it has proposed.
The regulator said it found that smaller occupational pension schemes are less likely to be able to exert pressure on asset managers because “there is some relationship between size and investment expertise and resources” and “larger pension schemes are more attractive to asset managers, allowing trustees to negotiate lower fees per pound under administration”.
It said there may be benefits from pooling assets to allow schemes to reap the benefits of scale but acknowledged that there are challenges in doing so, such as merging schemes when they have different liabilities.
The FCA is therefore consulting on this, asking if there are ways in which different types of UK pension schemes – defined benefit (DB) and defined contribution (DC) trust-based and DC contract-based schemes – could pool assets more effectively.
It is also asking what benefits may arise from pooling, and how any logistical challenges could be overcome.
The FCA said smaller pension schemes are less able to secure discounts from asset managers, and that it is likely they could achieve “significant” cost savings by consolidating their assets.
UK local government pension schemes (LGPS) are in the process of creating asset pools, and the FCA cited the collaboration between London local authorities, the London CIV, as an example of cost savings that can be achieved from pooling assets.
Consolidation could improve the effectiveness of oversight, especially among smaller trust schemes, according to the FCA.
Responding to the FCA’s report, the chief executive of the UK’s pensions association said its findings on institutional investors “mirror those of our defined benefit taskforce”.
Joanne Segars, chief executive of the Pensions and Lifetime Savings Association (PLSA), said: “We look forward to working with the FCA and government to find solutions that address the fragmented nature of the demand side, including exploring the potential benefits of greater pooling of pension scheme assets.”
The PLSA’s DB taskforce unveiled its interim report last month, describing the UK DB sector as “not fit for the future”, with one of the problems being that it is too fragmented.
One of the potential solutions it flagged was scheme consolidation.
In its report, the FCA referred to developments in Australia and the Netherlands that help support schemes to achieve scale, such as the Dutch pensions supervisor, De Nederlandsche Bank, introducing “an extensive new governance structure”.
The FCA noted the ongoing consolidation in the Netherlands, where the number of pension funds has dropped from about 800 to 325 in the past 10 years.
In the UK, the FCA said, fiduciary management arrangements and master trust offerings “work to address the fragmentation of demand” by allowing providers to pool clients’ assets, but “the extent to which investors are benefiting from scale is not always evident”.