By Oliver Berger
An industry trend brought to the fore by the Government’s proposal to pool its 89 Local Government Pension Schemes (LGPS) into six wealth funds worth £25 billion in assets each; but one which permeates far deeper LGPSs alone. And the approach taken varies greatly from scheme-to-scheme across the board.
More than a third (39%) of UK pension funds plan to decrease the number of external asset managers managing parts of their portfolio over the next three years. Others intend to consolidate multiple retirement plans by pooling assets, or both assets and liabilities (70% and 65% respectively), either within the next three years or more.
Reduced cost and improved operational effectiveness are often given as the main rationale, potentially unsurprising given lower for longer yields and regulation driving up operational costs.
Across the industry, many pension funds are under intense scrutiny by boards and stakeholders to cut costs. The challenge is to operate more efficiently and maintain sufficient investment returns to fund acceptable levels of retirement income for members.
However, pooling resources should not only be viewed as a cost-saving measure, but also as an important means of developing new capabilities and opening up fresh opportunities.
For example, pooling assets and resources can bolster smaller funds’ bargaining power when it comes to engaging the external asset managers with the specialist expertise they need; whilst larger funds can benefit from the ability to share specialist knowledge allowing access to unfamiliar investment opportunities.
And for those schemes yet to insource, this could in part be because the more investment capabilities they take in-house, the more risk they inherently bring internally. So as they expand their internal investment teams, they also need to have the funds to support a larger in-house risk team and have the governance structures in place needed to realistically back them.
In addition to this, as funds diversify their investments their need for specialist talent is amplified. Investment professionals with expertise in niche assets are in demand — as well as new risk management, data analysis, and board-level skillsets.
Pension funds face competition in attracting more specialist talent from investment banks, asset managers and consultancies into their ranks will not be easy particularly for those planning to increase their exposure to alternatives. However, benefits outside of remuneration rates such as office location can play to their favor.
Whilst competition is a notable hurdle to overcome, the seas of change are here and this is one a large proportion are looking to address with 48 percent and 44 percent citing they plan to increase the size of investment and risk teams respectively over the next three years.
Although the trend for consolidation is on an upward trajectory, and insourcing is appealing to many funds, it is far from a panacea — consultants and as external asset managers will continue to play a vital role in key areas.
It seems that pensions are looking for fewer, but more valuable relationships with external consultants. This will intensify competition among consultants and asset managers alike, but it will also open up new opportunities for the most forward-looking firms.
Oliver Berger is head of asset owner solutions & strategic market initiatives, sector solutions, EMEA, at State Street
[1] and [2] Longtitude research conducted on behalf of State Street, Pensions with Purpose: Meeting the Retirement Challenge, 2015. Conducted amongst 400 global pension funds including 30 UK participants
