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In its response to the Financial Conduct Authority’s (FCA) asset management review, the Investment Association (IA) said it was “not axiomatic that performance, and ultimately funding… will be improved” through greater consolidation.
Citing data from the Pension Protection Fund (PPF), the IA noted that there was “no clear relationship between scheme size and funding level”.
On a PPF basis, schemes with fewer than 100 members were 93% funded at the end of March 2016, according to the lifeboat fund’s annual report, while those with 1,000 to 5,000 members were 82% funded. Schemes with 10,000 members or more were on average 87% funded.
The IA said in its report: “No evidence has been presented to suggest that increased scale alone will lead to better asset allocation decisions, a highly significant driver of returns for any investor.”
Instead, the “key driver” of improvements for pension schemes was “enhanced investment governance”, the association argued.
The UK’s local government pension scheme (LGPS) is undergoing a radical structural overhaul, involving the consolidation of assets into a small number of large asset pools. One of the most advanced, the London Collective Investment Vehicle, was cited by the FCA as an example of how pooling could help reduce costs.
The IA agreed that consolidation would help improve competition for mandates, but argued that it was “unclear” whether the cost savings claimed by the LGPS pools could be replicated in other arrangements.