Britain’s plans to bulk up local government and private employer pension schemes into ‘megafunds’ to boost domestic investment are likely to benefit larger asset managers over smaller, more specialist ones, industry executives said.
The megafunds’ consolidation will provide Britain with up to 80 billion pounds ($101.35 billion) in fresh investment firepower, Rachel Reeves said on Wednesday. She was speaking ahead of her first Mansion House address to City of London leaders, scheduled for later on Thursday.
Britain’s pensions regulator welcomed the proposed reforms, saying larger schemes would be better equipped to invest in the UK economy.
Amanda Blanc, chief executive of FTSE 100 insurer and pensions provider Aviva also said the proposals would “help get more savers into larger schemes that can offer better value and more opportunities for productive investment”.
Aviva, which says it is Britain’s largest workplace pension provider, manages 124 billion pounds in defined contribution (DC) pension pots, paid into by private sector employers and employees.
The DC pensions market currently totals more than 500 billion pounds, and is expected to grow rapidly.
While larger funds can typically use economies of scale to pay lower fees to the asset managers which invest their funds, the consolidation plans risked freezing out specialist asset managers that typically invest in riskier assets and charge higher fees, said Anne Glover, chief executive of venture capital firm Amadeus Capital Partners.
Pooled funds should “find a way to accommodate the industry standard fee structures and compensation mechanisms of venture capital, which rely on successful outliers to deliver outstanding performance for underlying investors,” she said.
Moreover, focusing on cost-saving could be counterproductive, said Simeon Willis, chief investment officer of consultants XPS, as specialist sectors such as private markets, whose managers typically charge higher fees, could offer better returns for investors.
Consolidation of the 350 billion pound local government pensions sector would require less of a shake-up, executives said. Pooling in that space is already under way, following reforms made by former finance minister George Osborne in 2015.
Britain’s ruling Labour party has said it would like to see local government pension scheme (LGPS) pools managed in-house. The investments in most pooled LGPS funds are currently farmed out to external asset managers.
Managing LGPS pools in-house could mean existing LGPS asset managers lose out, said Iain Campbell, head of LGPS Investment at consultants Hymans Robertson.
However, Paul Myles, head of LGPS at Schroders, said the asset manager had won mandates from existing pooled LGPS funds and that increased consolidation would “further underscore the importance of deep investment expertise”.
($1 = 0.7893 pounds)
(Editing by William Maclean)
