A Destination for Asset Allocators
Strength in numbers is one of the reasons pension consolidation is trending around the globe. The challenges facing smaller funds, including oversight, cost, maintenance and management, can hinder asset performance. Plus, smaller funds may have limited access to asset managers or types of investments that improve diversification and returns. By consolidating, funds can reduce costs while increasing efficiency.
Around the world, there are successful models of pension consolidation. The Netherlands, the UK, Australia and Canada have been bringing their retirement assets together for years, and in the Middle East, consolidation is growing in popularity.
The Netherlands is a pioneer of pension consolidation, with the total number of pension funds decreasing from about 1000 in 2000 to less than 200 in 2022.1 The vast majority2 (94%) of its pensions are in defined benefit (DB) schemes, but in 2023 will transition to two types of defined contribution (DC) contracts.
In the U.K., occupational DC pension plans decreased by nearly 40% from 45,150 funds in 2011 to 27,700 in 2021.3 On the DB side, more than 80 local government pension funds pooled their assets in 2018 4 5 into eight separate pools and are expected to consolidate to three pools by 2030. 6 7
With significant growth in its superannuation funds, Australia has one of the world’s largest pension pools.8 Growing performance scrutiny and pressure on smaller funds has increased. Australian Prudential Regulation Authority (APRA), Australia’s prudential regulator for the financial services industry, said in 2021 that funds with assets less than A$30 billion are “uncompetitive”.9
As another pioneer of the large public pension fund model, Canada’s Ontario Teachers’ Pension Plan has approximately $242 billion in net assets. Looking at the success of this model, 72% of Canadian pension funds surveyed in 2021 were considering consolidation.10
In the Middle East in 2021, aiming to cut costs, help investment returns and increase efficiency, Oman merged eight pension funds into two.11
And in the U.S., the State of Illinois enacted the Pension Consolidation Act in 2020, merging municipal fire and police pension plans, into the Illinois Firefighters’ Pension Investment Fund and the Illinois Police Officers’ Pension Investment Fund.
Global funds are continuing to rethink their pension models. When considering the increased efficiency and cost savings of a consolidated pool, it is a trend worth watching.
1 Netherlands: Pension transition drives consolidation | Country Report | IPE
2 https://www.thinkingaheadinstitute.org/content/uploads/2021/02/GPAS__2021.pdf
3 Defined contribution pension market consolidation continues, TPR’s latest figures show | The Pensions Regulator
4 https://mycouncil.surreycc.gov.uk/documents/s73145/14%20-%20Annual%20Report%202019-20%20-%20Annexe%201.pdf
5 http://www.lgpsboard.org/index.php/schemedata/scheme-annual-report
6 https://www.lgcplus.com/investment/lgps-pools-expected-to-further-consolidate-18-07-2019/
7 http://www.lgpsboard.org/index.php/schemedata/scheme-annual-report
8 Australia's top pension fund warns against tapping savings to fix economy | Reuters
9 Australian Pension Fund Chairman Urges Caution on Consolidation - Bloomberg
10 72% of Canadian pension funds considering consolidation options: survey | Benefits Canada.com
11 Pensions, sovereign wealth funds, and industrial policy in the Gulf: A look at fund consolidation | Middle East Institute (mei.edu)
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