News Analysis: Local authority pension scheme mergers have gained importance throughout the UK as a way to decrease costs and provide economies of scale for investments, but experts warn it takes organisation to execute.
Oxfordshire, Buckinghamshire and Berkshire are in preliminary talks about merging their funds, and the Wandsworth Council Pension Fund has set its sights on leading a London-wide collective investment vehicle.
There are potential cost savings even if pension plans are kept separate
A sure sign of the increased importance of pension schemes mergers is the rise of a vocal constituency of advocates for the policy.
Edmund Truell, chair of the London Pensions Fund Authority, is merging the capital’s local authority pension funds into a pan-London fund, pooling the assets of 32 boroughs with those of Transport for London.
Truell and others have cited the many benefits to scheme members as a result of such mergers and at the top of that list are the cost savings that come from scale.
Simon Cohen, director of JLT Investment Solutions, said scheme mergers may still mean that two pension funds are kept separate or may be combined, but in either case there is scope for money to be saved.
“There are potential cost savings even if pension plans are kept separate because there is just one sponsor and potentially they can negotiate with fund managers to set lower fees,” he said.
The power to negotiate
Alongside cost savings, merged schemes will be able to draw on more assets and hence will be able to spend more on governance. It is felt that in such scenarios, where they have a greater range of assets, they are likely to go for more complex asset allocation solutions.
As Cohen notes, mergers have implications for the advisers used by pension schemes, adviser fees, asset management and investment strategy.
He said: “They may change investment strategy because of a change in employer covenants, [the] liability profile and there may be a change in the trustees.”
With the arguments in favour of scheme mergers stacking up, the case for blending pension funds into one vast scheme seems to be a clear one. This is to an extent the way pensions are organised in the Netherlands, where the Dutch tend to have super-sized industry-wide pension schemes that can afford more internal expertise.
The inevitable question is why mergers do not happen more often if they are so good. Part of the answer is that it is very difficult to make sure all the beneficiaries are treated equally.
Phil Irvine, director of Pirho Investment Consulting, said in practice it is not as easy to merge schemes as it would appear. Collaborating on investment committees has been tried in big pension schemes, for example at Unilever.
“The advantages are pooling together governance arrangements and more buying power but it all takes time to organise and also companies don’t always want commonality and to share what they do. They may guard their independence,” he said.
Nonetheless there seems to be a clear trend towards pension scheme mergers, especially with defined contribution schemes, according to Patrick Bloomfield, partner at Hymans Robertson, though he saw less room for merging among defined benefit schemes.
"There is a clear trend of consolidation of DC schemes and lots of providers have set up master trust arrangements to that end," he said.
