Consolidation of pension funds to gain economies of scale is an idea often proposed but rarely embraced. Pooling assets and resources would improve efficiency and investment performance.
The creation of the Investment Management Corp. of Ontario in July is a step in the direction in which more public funds should move. By pooling assets, IMCO holds the promise of strengthening public pension and other public funds by reducing investment management fees and administrative costs, resulting in better investment performance.
IMCO initially will pool the assets of the C$26 billion ($19.7 billion) Workplace Safety and Insurance Board and the Ontario Pension Board, which oversees the C$23 billion in assets of the Ontario Public Service Pension Plan. IMCO expects other public-sector funds to apply to participate. Involvement is voluntary for funds, which would retain ownership of their assets as well as responsibility over how IMCO invests those assets. IMCO is an outcome of a consolidation proposed in a 2012 report for the provincial government's ministry of finance. The “implementation of such a framework would reduce duplication and costs, broaden access to additional asset classes and enhance risk management practices,” according to the report, “facilitating pooled asset management for Ontario's public-sector institutions.”
Challenges in embracing consolidation have deterred its realization.
Indiana's combination of the administration and investment management of five state plans into the Indiana Public Retirement System in 2011 was the last major consolidation in the U.S. market.
Other proposals have failed to gain traction, often because of loss of control by the entrenched political interests in the process of appointments, and hiring and firing managers.
In 2011, New York City Mayor Michael Bloomberg and John C. Liu, city comptroller, called for unifying the boards of the New York City Retirement Systems. Mr. Liu called the systems “unwieldy, inefficient and heavily politicized.”
Also in 2012, Jack Wagner, state auditor general, proposed consolidating 3,200 municipal plans in Pennsylvania into a new statewide system.
Among other consolidation proposals, Alexi Giannoulias, state treasurer, proposed in 2008 consolidating five Illinois statewide retirement systems, creating the Illinois Public Employees Retirement System. The state had moved part way to such a goal in 1969 with the creation of the Illinois State Investment Board, pooling assets of three of the funds.
All three proposals failed to be adopted.
Markets are increasingly complex and sophisticated, and consolidation would provide public plans with more resources to invest more effectively, improving investment performance, reducing fees and other costs, and bolstering retirement income security. n
