Financial experts are advocating more pension tinkering after an international study of workplace schemes concluded retirement savers could benefit from pooling resources.
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The study looked at defined contribution pensions offered by employers and found that pooling could lead to benefit from economies of scale.
This was most significant when schemes looked at:
- Negotiating fees for managing illiquid assets, where larger funds could gain cheaper rates
- Developing in-house expertise when pooled pensions made the move more cost-effective
The report ‘The impact of DC asset pooling: International evidence’ by the Pensions Policy Institute also argues pension pooling could lead to stronger governance and reduced costs.
Researchers compared defined contribution pensions in the UK with similar pensions in Australia, South Africa, Mexico and Italy.
Conflicting evidence
Lauren Wilkinson, a PPI policy researcher, said:“The UK defined contribution landscape is somewhat fragmented, with many schemes and variation across the market. In general, larger funds provide evidence that pooling is associated with lower charges, improved governance and access to alternative assets such as infrastructure.
“Although some of the evidence from overseas is conflicting, this may be in part because of regulations and economic circumstances in each specific country. But if all the potential benefits of pension 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.”
Recently, the Department of Work and Pensions released draft regulations to make defined contribution pension pooling easier for workplace schemes.
Creative ways
“Asset pooling in DC schemes has been limited to date with few benefits to most members in the UK,” said Lesley-Ann Morgan, Global Head of DC and Retirement for fund manager, Schroders, the firm that sponsored the research.
“However, we believe that learning from positive international DC pooling experience is an important milestone in the journey to improving outcomes for UK DC members.
“By pooling assets, improving governance and focusing less on daily pricing, we believe outcomes can be improved for UK members. 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.”
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