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The Actuary The magazine of the Institute & Faculty of Actuaries

Pension fund asset pooling could boost retirement pots by around 62%

Greater pooling of the UK’s defined contribution (DC) pension funds could result in greater investment returns and improved retirement outcomes for members.

Pooling assets can improve returns / shutterstock
Pooling assets can improve returns ©Shutterstock

That is according to a new report from Schroders and the Pensions Policy Institute (PPI), which shows that pooling can lead to governance improvements and greater scope for portfolio diversification.

This in turn can help deliver higher returns for schemes, with an increase between 0.35% and 1.5% estimated to potentially boost members’ pension pots by 16% to 62%.

In addition, it is thought that pooled schemes could use their scale to enhance their negotiating position when agreeing fees for illiquid assets, as well as help develop the internal expertise to invest in alternatives directly.

“By pooling assets, improving governance and focusing less on daily pricing, we believe outcomes can be improved for UK members,” Schroders global head of DC and retirement, Lesley-Ann Morgan said.

“More creative ways need to be found in the UK to facilitate investment in asset classes such as alternatives and illiquid assets to better invest, improve and protect members’ outcomes for the future.”

The research involved comparing DC schemes in the UK with those in Australia, South Africa, Mexico and Italy, finding the benefits from pooling are largely down to the strategies schemes choose to implement with their increased scale.

For example, schemes may seek to access benefits of scale through fiduciary management, with the manager acting as a consolidator, enabling access to a wider pool of assets.

In addition, transferring into a larger scheme may also help to lower charges for members, according to the report, particularly where charges within the original scheme are relatively high.

However, the research found the benefits of pooling DC funds in the countries studied was mixed, with large funds outperforming smaller ones in Australia, but failing to do so in Mexico.

“Although some of the evidence from overseas is conflicting, this may be in part because of regulations and economic circumstances in each specific country,” PPI policy researcher, Lauren Wilkinson, said.

“If all the potential benefits of DC pooling could be realised in the UK, this could lead to better member outcomes through increased pot sizes, and as a result, a better standard of living in retirement.”

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