Scale is at the heart of designing good defined contribution retirement, and U.K. policymakers should think hard about the benefits of scale as they reform the way their DC plans are structured, said Jeremy Cooper, who oversaw a review of Australia's superannuation system in 2010.
Providing DC retirement benefits “is not a cottage industry. It is a scale game,” Mr. Cooper said March 9 at the National Association of Pension Funds' 2012 investment conference in Edinburgh. Mr. Cooper is the Sydney-based chairman, retirement income, at Challenger Ltd., an investment management and annuities company.
The larger a DC plan is in terms of assets, the easier it is to lower per-member costs. Scale also leads to better governance. “That's not automatic, but there's a fairly consistent pattern” that as a fund grows, the more it's able to provide things like more talented staff and expert subcommittees to help run the fund, he said.
Mr. Cooper called the NAPF's proposal to create “super trusts” in the U.K. an “extremely good idea” to create cost-effective and well-run plans for all Britons.
Scale is just as important in DC as it is in defined benefits plans. He praised a proposal to consolidate management of New York City's five defined benefit plans to save an estimated $1 billion a year, as well as efforts in Canada to build large, government-sponsored DB plans.
“There's no reason DC schemes can't operate at that scale, and indeed they should,” Mr. Cooper said.
In the U.K., the NAPF is promoting scale in the form of “super trusts,” or a handful of large, multiemployer DC providers. The industry group started promoting the idea six years ago, ahead of the creation of the National Employment Savings Trust, or NEST, a nationwide DC plan designed for lower-income workers. NEST began taking on its first members in 2011.
Mark Hyde Harrison, chairman of the NAPF, said at the conference that consumer advocates in the U.K. will start to demand more cost-effective retirement offerings, and that super trusts are the right providers of better overall DC plans. Members “will be able to get much better costs and much better (investment) outcomes” from super trusts, he said.
He foresees five to six super trusts that would build scale quickly by aggregating retirement savings for people as they changed jobs.
In January, the 579 billion Danish krone ($102 billion) ATP, Hilleroed, Denmark, launched NOW Pensions, a U.K. DC multiemployer trust that many conference speakers cited as possibly the first of the super trusts.
Morten Nilsson, CEO at NOW Pensions, said at the conference that his firm will offer a single investment option, which will be managed similarly to the way ATP's DB assets are run. He said the DB assets have yielded an average annualized return of 7.4% over the decade ended Dec. 31.
“We have one solution, and that solution will take you through your life,” Mr. Nilsson said.
He agreed that bigger is better: it lowers costs and makes a fund more competitive.
Participant costs for NOW Pensions will be �1.50 ($2.34) per month, plus a fee of 30 basis points on assets under management, with special rates for lower earners and deferred members.
Mr. Nilsson said the next two to three years in the U.K. will see a land grab for market share in DC, but he cited a couple of major obstacles to breaking into the British market. For example, he estimates the U.K. already has some 50,000 existing pension plans. “It's an overcrowded market to begin with,” he said.
Plus, while unions in Denmark and elsewhere were the driving force behind company DC contribution regulations, their British counterparts haven't taken up the charge in the U.K. That could result in slower growing retirement pots for U.K. workers, and fewer assets to provide the system with scale.
But Brian Henderson, Edinburgh-based principal at Mercer, isn't sold on the super trust concept. “The NAPF needs to recognize there's some good stuff going on already” at company DC plans in the U.K., he said in an interview on the sidelines of the conference.
“We're quite agnostic to these different approaches. We're just interested in what's best for member outcomes,” he said, adding that super trusts won't necessarily be best for all workers, and that super trusts aren't regulated by the U.K. Financial Services Authority. “That's wrong; that needs to change,” he said.
