In an ideal world, pension fund mergers create advantageous economies of investment and administration scale that benefit members, pensioners and sponsors long term. In the real world, pension funds are complicated to merge, not least because social partners often demand that everyone has a seat around the board table.
The last 10 years or so have seen a number of quite high-profile pension fund mergers, like the coming together of the two Dutch metal funds or that of Cordares and APG. In January, the Danish fund for lawyers and economists, JØP, merged its investment operations with those of the engineers’ fund DIP. Some regulators, like the Dutch DNB, have stated explicitly that bigger is better. Indeed, the number of Dutch pension funds has shrunk considerably over the past few years, albeit with most consolidation through company funds joining large industry ones.
But there has been a significant number of unsuccessful mergers in the Netherlands in recent years. Most recently, the €4.1bn PNO media pension fund has suspended talks with the graphics industry’s €14bn fund.
In Denmark, Unipension, administrator for three professional schemes, including those for architects, medics and vets, was to acquire a 25% stake in the administration company Forca in return for outsourcing its pensions and advice functions. The deal fell through this July after the two parties failed to agree terms.
A vigorous debate has started in the UK public sector around economies of scale in the Local Government Pension Scheme, which is administered by 89 separate funds in England and Wales alone. Some funds are now considering co-operation deals and work has been ongoing for some time on common procurement frameworks for investment and advisory services.
But, predictably, there is considerable hostility to forced mergers, partly because local authorities like to retain organisational independence and decision-making capabilities.
There is a common view that M&A in the corporate world does not add value, although academic evidence is patchy, with one paper from the last decade showing that while target shareholders receive substantial returns, business acquirers get a zero return.
Certainly, some corporate M&A activity is driven by the ego-fuelled CEOs, who feel the need to prove their credentials to shareholders. Much is fuelled by investment banks and consultants, of course, who get a cut from the deal.
In the largely stakeholder-driven and non-profit world of pensions, it ought to be straightforward to drive through sensible merger or other co-operation plans that make sense for all concerned. That it sometimes proves difficult is a reflection that pension funds are no less complex organisations than their corporate brethren – sometimes more so.