The U.K. government should move forward with a proposal to pool the assets of 89 local pension funds in England and Wales as a long overdue step to improve investment management outcomes and oversight of these funds. But the government should scrap the idea accompanying the proposal to steer some of the assets into an allocation to U.K. infrastructure as an unacceptable political intrusion.
The government should not turn the pension plans into an arm of its economic development agency. Plan executives must remain faithful to their fiduciary duty to oversee assets solely in the interest of participants.
A decision on infrastructure or whatever asset class to include in their strategic asset allocation belongs solely to the fiduciaries of these would-be megafunds to fit the return and risk objectives they set.
As for the pooling idea itself, it would strengthen the capability and sustainability of the plans in their aim to secure retirement income for participants and enhance fiduciary oversight.
The government can make a strong case for consolidation of the assets of the pension funds, which have combined £190 billion ($273.5 billion) in assets. But the proposal's call for pooling the assets into six so-called megafunds of at least £25 billion needs further study as to whether such a combination or another combination is the best course to strengthen the plans' sustainability and create efficiencies.
Further information on these plans might come out March 16 when George Osborne, chancellor of the exchequer, presents the U.K. budget to Parliament.
Trending market dynamics are more complex and sophisticated, meaning asset owners must likewise have sophisticated tools and strategies to invest effectively and efficiently to achieve objectives.
This necessitates greater size to command scale and resources to compete in the increasingly challenging investment marketplace.
If the British government can bring off such pooling it might spur similar moves in state and local governmental plans in the U.S. that have resisted such efforts so far.
However much sense pooling makes, the proposal won't necessarily be easy to bring to fruition.
In North America, at least, pooling schemes of similar merit have fallen short of approval, leaving the affected funds increasingly challenged to meet objectives because of insufficient resources, no matter how capable the trustees overseeing those assets.
Such proposals have a long history. “On Jan. 8, 1919, Gov. Frank O. Lowden (of Illinois) delivered a message to the General Assembly recommending "a consolidation' of pension fund assets in the state under a central state supervising board,” said the 2015 biennial report of the Pension Division of the Illinois Department of Insurance Public, issued Oct. 1.
In the report, the pension division again recommended a consolidation of assets, this time of the 657 suburban Chicago and downstate police and fire pension plans in the state. Together they have some $12.2 billion in assets and $21 billion in liabilities for a funded ratio of 58%. Pooling those assets could go a long way toward improving the governance and investment oversight of the assets, if implemented wisely.
In 2009, an Illinois state commission sought advice on consolidating the investment management of five statewide retirement systems, whose combined assets total some $74.5 billion. The proposal failed to gain traction.
Consolidation can take different forms. In February, the Civic Federation of Chicago, an independent research organization, recommended consolidating the administration of the $43.5 billion Illinois Teachers' Retirement System, Springfield, and the $9.4 billion Chicago Public School Teachers' Pension & Retirement Fund under a single board. Under the plan, their assets would remain separate. The administrative consolidation would gain efficiency and effectiveness as trustees together call for more uniform pension funding of the two systems, as well as improving accountability, even if the combination doesn't have the advantage of pooling of assets.
A report commissioned by the Ontario government in 2012 and prepared by William Morneau, executive chair of Morneau Shepell Ltd., a human resources consulting and outsourcing services company, could provide guidance for the U.K. government and its proposal.
The Canadian report called for creating a pooled fund of C$100 billion in assets by consolidating the assets of some 100 public-sector pension, endowment, working capital and other funds in the province.
“Implementation of such a framework would reduce duplication and costs, broaden access to additional asset classes and enhance risk management practices,” all to improving outcomes, the report stated.
In Pennsylvania, Jack Wagner, then state auditor general, the same year called for combining smaller public plans in the state. In a study, he examined 2,600 plans receiving state contributions. Their combined assets total some $10 billion. That bigger scale would have provided more resources for more effective oversight than available to the plans, whose assets on average total $3.1 million each.
Among other pooling proposals, in 2011 Michael Bloomberg, then New York City mayor, and John C. Liu, then city comptroller who oversaw the New York City Retirement Systems, called for unifying the boards of the five separate city pension funds, whose assets now total a combined $155.1 billion. Mr. Liu called the systems “unwieldy, inefficient and heavily politicized.” But the proposal failed to advance.
Many states could benefit from consolidation.
The Wagner report noted that after Pennsylvania and Illinois, states with the largest number of public-sector defined benefit plans are Florida with 302, Minnesota, 137 and Michigan, 132.
But large plans cannot achieve advantages of scale without well-structured governance and management with well-defined objectives, focused on implementing, monitoring and measuring them.
Bigger systems create no promise of greater sustainability. The California Public Employees' Retirement System, Sacramento, the biggest U.S. defined benefit plan, is only 69.8% funded. Effective and efficient investment oversight meeting objectives of risk and return cannot alone sustain a retirement plan. In general, investment returns provide about 60% of assets needed to pay benefits. Plans are dependent on sponsors designing affordable pension benefits and providing necessary actuarial required funding on time. But over time improved investment returns can reduce the costs to taxpayers and employees.
Sponsors of smaller plans should get together in whatever groups make financial sense to explore the idea of pooling assets. Pooling would take care of at least one part of the pension funding equation: the more efficient administration and investment of assets to better sustain retirement plans.