Paul Traynor says UK schemes can learn a lot from the overseas experience of scheme consolidation
Overseas pension funds have benefited from scale for years, enjoying lower operating costs and higher levels of infrastructure investment.
Today UK local government schemes are seeing the benefits of consolidation, so now is the time for the UK Government to encourage private sector defined benefit (DB) pension schemes to pool their collective purchasing power.
It is easy to work out what scale can do for pension schemes. Sub-100 member schemes cost £432 per member per year to administer, seven times the £64 paid by schemes with more than 5,000 members. Investment costs average £211 per member for the smallest schemes, almost triple the £78 cost to the biggest schemes.
The UK DB landscape is fragmented by international standards and shows virtually no sign of consolidating by itself.
In the Netherlands, the regulator has actively encouraged consolidation - pension fund numbers fell from 800 to 365 between 2005 and 2015. Denmark now has just 25 schemes while Finland has around 20.
The UK meanwhile has around 5,800 DB schemes, of which more than 2,000 are sub-100 members and around 2,300 have between 100 and 1,000 members. Even the UK's largest DB fund, the £53bn BT Pension Scheme, ranks a mere 50th in the world pension fund assets league table.
Consolidating the purchasing power of these smaller schemes will lead to significant cost savings. The good news for policymakers is enacting change in this area is no longer a leap in the dark.
Operational efficiencies and economies of scale are already being achieved through consolidation in the UK Local Government Pension Scheme (LGPS). Yes there is still much work to be done, but the pooling policy initiated by the UK Government is on course to provide substantially lower operating costs for schemes and their sponsors.
Whether the UK is ready for the superfunds recently proposed by the DB Taskforce is a matter for thoughtful debate, but its first three proposals - the pooling of administration functions, assets and governance costs - should bring in the lion's share of the £1.2bn a year projected cost savings.
Policymakers can afford to be bold in pooling across these areas. As with the LGPS, these savings would be made without merging liabilities. And it is not just the LGPS combining assets to improve their purchasing power - so too are some actuarial consultants who buy on behalf of multiple clients.
Examples of pooling
What's more, examples of pooling already exist. The Electricity Supply Pension Scheme has £39bn of pooled assets from a group of underlying schemes, while the various schemes under the Railpen umbrella constitute a single £27bn purchaser.
As well as cutting costs, consolidation would also help the government achieve its vital goal of driving more infrastructure investment from pension funds. Infrastructure is all about scale, which is something in short supply among UK schemes.
That explains why in 2012 infrastructure stood at just 2.1% among open UK schemes and 1.1% among schemes open to future accrual. This is minuscule when compared with historic levels of between 8 and 15% in countries such as Australia and Canada.
Twice the size of our biggest scheme, the £101bn Ontario Teachers Pension Plan (OTPP) is a perfect example of a fund with scale accessing infrastructure in the UK.
As pension minister Richard Harrington MP has pointed out, OTPP owns Camelot, the company headquartered in his Watford constituency, as well as being major stakeholders in London City Airport and the HS1 Channel Tunnel rail link. Today none of the 4,300 sub-1,000 member schemes can invest both substantially and directly in UK infrastructure - nudged together by the UK Government they could.
Compelling schemes to consolidate could, as was the case with the LGPS, probably be done without legislation. And government could also stimulate voluntary consolidation by changing the Pension Protection Fund rules so that lower levies can be charged to schemes that come together to achieve scale.
On the structure of reforms two issues are key. Firstly, the UK Government could develop a new form of tax-transparent fund along the lines of the Dutch Algemeen Pensioenfonds (APF), to complement the current UK Authorised Contractual Scheme (ACS) structure.
The advantage of the APF structure over the ACS structure is there is no legal doubt as to the APF's ability to resist the retention of withholding taxes on property dividends. The launch of a government-sponsored consolidation initiative is the perfect opportunity to develop a new, more streamlined tax-transparent vehicle.
Secondly, the UK Government could mandate there only be a maximum of two or three infrastructure pools - enough to create competition but few enough to ensure they generate real scale to access the very best infrastructure opportunities.
The rationale for change is clear - now is the time to take bold steps towards consolidation.
Paul Traynor is international head of pensions and insurance segments at BNY Mellon
 www.thepensionsregulator.gov.uk/trustees/db-scheme-costs-tool.aspx#s14483 2014
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