Better together

As the number of pension schemes across European countries consolidates, Laura Blows explores why this is occurring and the benefits mergers can provide

To talk about the ‘European pension market’ is somewhat of a misnomer. The pensions industry is so diverse between countries and regions that it is difficult to talk about European pensions as a single entity. However, there is common ground when it comes to size. For European pension funds, it seems agreed that ‘bigger is better’.

For the past decade, pension funds in many countries have become fewer in number but larger in size. Italy, for instance, has seen the number of its pre-existing pension funds fall from 411 in 2008 to 361 in 2012, according to Cerulli Associates’ research, while AXA Investment Managers’ report, Is big better?, found that the number of private pension funds in Switzerland has shrunk by one-third to fewer than 2,200 over the past decade.

Leading the way in this are Denmark and the Netherlands, unsurprisingly. Ranked first and second respectively in the latest Melbourne Mercer Global Pensions Index, they are seen as examples of successful pensions systems built upon large schemes.

Denmark currently has 25 schemes, with industry figures predicting this could decline further, to 10-15 schemes within the next decade. Meanwhile, over the last 20 years the number of pension funds in the Netherlands has declined from 1,100 to less than 400 today.

Why shrinking

The natural attrition of DB schemes as they mature undoubtedly plays a role for the shrinking of the market. However, the double whammy of regulatory pressures and increasing costs, in terms of both money and time, of running a scheme are generally accepted as the main reasons accelerating this trend.

PensionsEurope secretary general and CEO, Matti Leppälä cites Finland as an example where regulation has led to the number of company and industry-wide funds decreasing from approximately 60-70 a decade ago, to around 20 today. The reason, he explains, is because “Finnish legislation has made it advantageous to close down your own fund and move the assets and liabilities to pension insurance companies”.

Competition between the Finnish pension insurance companies has led them to consolidate too, Leppälä adds, as its third and fourth largest insurers merged at the start of the year.

In contrast, for Previnet senior manager of pension fund services and internal clients Martino Braico, increasing costs are the main driver for pension schemes closures and mergers in Italy.

“Managing a scheme is getting more and more expensive,” he says. “To mention just some issues, a pension scheme or plan sponsor needs to accurately manage member records, comply with legislation coming regularly from supervisory bodies, to guarantee adequate governance, to provide members with websites and online tools and to manage the investment journey according to increasingly sophisticated investment options.”

As a result, small to medium sized funds decided – or were forced to decide – to merge with larger funds or cease their activities, Braico adds.

One such example, in which Previnet was involved as a TPA, was the merger two years ago of three occupational pension schemes, Previprof, Artifond and Marco Polo, into the multi-employer pension fund for the services sector, Fon.Te.

At the time around 17,000 members and €84 million were merged into Fon.Te. Now the fund has 195,000 members and is the second largest occupational scheme in Italy by number of members.

Braico notes that a similar process of aggregation has been happening with the ‘open’ pension funds sponsored by insurance companies. This has involved names such as Cardif, Aviva, Unipol, Mediolanum, Groupama and Uniqa.


In the Netherlands, Towers Watson senior consultant Paul Kelly has seen a lot of clients struggle with the amount of regulation imposed on them. This had led to the regulator DNB actively encouraging pension funds to merge into industry-wide schemes.

Wim van Ooijen, country head for the Netherlands at custodian and asset management firm Northern Trust, says that the Dutch regulatory framework is continually evolving to support good governance in pension funds, which has driven them to encourage consolidation.

This desire for fewer, larger pension funds is understandable from a regulator’s perspective, Kelly adds, especially if they handle both pension schemes and insurers.

“They want size and scale,” Kelly explains, and “looking at it from an insolvency perspective, they want to make sure that it is a stable system”.

There is a consensus that by merging schemes into larger-sized funds, they would be able to achieve economies of scale, both in terms of administration costs and investment opportunities, along with improved governance.

For Leppälä, the main benefit to being a larger scheme is the cost efficiencies it can bring to administrative costs, compared to the benefits it brings on the investment side.

“Admin costs make all the difference, as year after year they are paid out of the scheme. A reduction in admin costs can have a huge knock-on effect to fund size,” he explains.

Schemes merging together can also result in increased professionalism. According to Kelly, it may become easier to find member nominated trustees on the trustee board, as fewer are required.

JLT Pension Capital Strategies managing director Charles Cowling agrees that this is beneficial, as “one of the problems DB suffers, and DC to a certain extent, is a lot of well-meaning but amateur trustees. Master trusts give you a vehicle to effectively hand it over to the professionals.”


But despite the considerable benefits that consolidation can provide, it is not a straightforward process.

Last year, Denmark’s Unipension, the administrator for three pension schemes, wanted to enter into a ‘cooperation’ with fellow admin company for pension funds, Forca. Following a two month analysis, it was announced in July that “cooperation cannot be completed on terms that satisfies both parties”.

Pension funds consider merging to be a complex business, as their respective funding levels need to be taken into account, along with each of their contribution levels, the solvency of each sponsor and the rights that have been accrued by members in each scheme. The legal costs also have to be taken into account, as does the time dedicated to the process.

While the burden of increasing regulatory pressure has caused pension schemes to merge, conversely for UK DB schemes it is also preventing mergers from occurring. Cowling estimates that the UK DB industry shrinks by about 200 schemes a year, but due to wind ups or entering the UK government safety net, the Pension Protection Fund (PPF), not through consolidation.

“Twenty years ago it used to be the case that companies would consolidate their pension schemes, if they had bought lots of businesses along the way and acquired many legacy schemes, for obvious cost saving reasons,” Cowling explains, “but now that has almost entirely disappeared as regulations make it more difficult.”

Trustees are forever being “bashed” by the regulator to act in the members’ best interests, he adds, “so if you are merging two pension schemes one will inevitably be in a stronger position than the other, which trustees of the stronger scheme will naturally be disinclined to do”.


From the investment side, arguments supporting pension fund consolidation suggest that larger funds benefit from asset management fee reductions and improved investment returns. They are also able to gain better access to ‘alternative’ asset classes.

According to AXA’s report, small funds often find it difficult to justify the incremental benefit of an alternative allocation against the cost required to research and monitor these opportunities. Alternative asset managers may also impose high minimum allocations, pricing out small funds.

This can be overcome by small funds investing in multi-asset funds or fund-of-fund solutions, though they would have to accept the lack of transparency, inflexible allocations and an additional layer of management fees that larger funds avoid by accessing the investment opportunity directly.

However, that does not mean that a larger fund doesn’t have its own investment challenges, as it may be ‘too big’ to invest in alternatives in the way it wishes, due to capacity issues.

When looking at ‘traditional’ asset classes, AXA found scale can actually erode performance, due to a lack of flexibility to implement trading ideas and difficulty switching in and out of large positions.

Along with fees, the size of the fund may also affect its risk management processes. For instance large pension funds are more likely to implement bespoke LDI strategies, while smaller funds have to rely on pooled funds, as the costs, resources and level of expertise are too prohibitive for a tailored solution. Yet AXA warns that large funds have to worry about the size of hedges being traded, as over the past few years the capacity for schemes to implement large interest rate and inflation hedging trades have declined.

To try and blend the best of both worlds, of receiving reduced fees and accessing investment opportunities without losing flexibility and control, pension funds can partner with another fund to negotiate a collective fee agreement or create a common investment vehicle (CIV).

This enables each pension fund to retain control and flexibility over their investment strategies, but the fees agreed would be based on the total assets invested across all participating funds.

In December 2013, London’s 32 boroughs announced they would push ahead with a £20 billion CIV for their pension funds, with the aim of reducing administration costs, increasing return on investment and maintaining local accountability and control. It could also open up the possibility of more investment in infrastructure, London Council’s chair Jules Pipe said at the time.

Continuing to consolidate

Pension funds working together to access investment opportunities - without all the wrangling of a full merger - certainly has benefits, but the trend for consolidation isn’t stopping any time soon.

It is a widely held view that the Dutch regulator wants pension funds to settle at around the 100 mark, reducing the current number of schemes by about a quarter. European Pensions understands that there are currently more than 60 pension funds involved in consolidation processes – and these are not just corporate pension funds, but also small industry-wide funds.

Currently the benefits of consolidating state pension funds are being explored in Sweden, as a government review in 2012 recommended cutting the number of AP funds from five to three, or alternatively merging the funds into one.

The review found that parallel structures, poor governance and current investment rules have reduced annual returns by at least 1 per cent, or SEK 9 billion (€1.35 billion) and added around SEK 250 million to costs. Consolidation would apparently lower costs and improve returns on the $131 billion of assets being managed for the country’s retirees.

While these options are still being considered, the PPM platform is also being reviewed. A report published for the ministries of finance, health and social affairs in summer 2013 proposed chopping the 793 funds available on PPM to just 10, with different risk and investment objectives.

The UK government has also been looking at the possibility of restructuring the ‘woefully inefficient’ local government pension scheme (LGPS). A report by the Centre for Policy Studies, The Local Government Pension Scheme: Opportunity Knocks, published in November 2013, described the LGPS as a “disparate collection of 101 opaque, predominantly small funds, with excessive costs and lax governance”. It claimed that restructuring could reduce costs by £860 million a year.

Even stronger calls have been made for consolidation across the UK DC landscape. From ‘pot follows member’ proposals to avoid retirees having a myriad of small-sized pension funds, and the nine million extra people estimated to be saving into a workplace scheme by the time auto-enrolment is fully rolled out in 2018, to the Office of Fair Trading study published in September 2013 finding around £10 billion of assets were in held in small and medium sized trust-based schemes at risk of delivering poor value for money due to lower standards of trustee engagement and capability, it seems ‘bigger’ is the buzzword.

Mercer senior associate Anne Bennett says that as regulation comes in that implicitly or explicitly focuses on charges and governance, there is going to be the need to comply with a more complex regulatory environment for DC. “That dictates that schemes will need to be larger to be viable,” she adds.

The number of DC schemes in the UK is set to increase in the short term as auto-enrolment unfurls, but it is expected to then decline as master trusts continue to enter the market.

According to the National Association of Pension Funds (NAPF) policy lead, DC and investment, Richard Wilson, the association has been calling for the market to move towards fewer, larger schemes, for a long time as “they have the scale to provide strong governance, get good value access to investments and are able to get the best from investment advice”.

However, Wilson warns that a new regulatory framework is required to reflect this changing landscape, as “at the moment anyone can set up a master trust”.

The effects of this focus are starting to be felt though. For instance last year’s figures from the UK’s Office for National Statistics found occupational schemes with between two and 11 members had declined from around 300,000 in 2004 to about 100,000 in 2012.

Another country struggling with its high number of small schemes is Ireland.

The Pensions Board’s recent DC consultation identified issues around scale and the lack of bargaining power small schemes have with providers. The number of schemes in the market was also among concerns, as were costs, the design of default strategies, and communications.

The Irish Association of Pensions Funds CEO and director of policy Jerry Moriarty says that the regulator has made it very clear that Ireland has far too many funds, and that “we should have no more than 100”.

“But one of the reasons we have so many small funds is due to tax issues. An individual receives better tax relief if they set up a one-man trust, so they would really be in contract plans if there was a level playing field across the tax structure,” he adds.

There have also been calls for the country to implement some form of auto-enrolment, which Moriarty expects would generate consolidation. However, as the timetable for this is unclear, it will be a “good few years” before this will occur, he adds.

European countries may receive a further push towards consolidation as the IORP Directive comes into effect, with or without the issue of funding requirements. Its focus on governance will require pension funds to have internal audits, risk and insolvency assessments and possibly even remuneration committees, Kelly warns. “That will accelerate the trend of small schemes consolidating due to the directive adding a whole raft of administrative and governance costs”, he adds.

Changing landscape

According to Kelly, this, in turn, may bring about Solvency-II funding regulations for pension schemes. He gives the example of Denmark, where the fewer pension funds “to an outsider look and feel like insurance companies, reducing the argument against Solvency-II style funding requirements for pension funds”.

In the UK, the shrinking DB landscape could have an “interesting effect” on the PPF, Cowling says. “As we get fewer and fewer schemes, the population of levy payers goes down and more pressure is placed on those that are remaining. It would accelerate exit strategies as schemes would be worried that they would have to foot the bill if something goes wrong with the PPF,” he explains.

Buck Consultants head of pensions policy Kevin LeGrand is also concerned about how the relationship between member and sponsor will change as more schemes enter master trusts. According to LeGrand, there will be less connection and ‘ownership’ by each employer with its employees’ pensions, reducing the HR bond between them.

The relationship between pension fund and provider is also likely to change, as fewer pension funds will likely mean fewer providers.

While monopoly issues may occur, the outlook for this larger, fewer, consolidated pensions fund future across Europe seems broadly positive. According to Bennett: “We are talking about a competitive market with the correct number of large players, rather than a uncompetitive market with lots of small players.”

Written by Laura Blows

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