Pension funds desperately want to cut costs, but consolidation is not the answer
Public pension funds merging with their peers have always praised it as a smart way to cut costs and achieve economies of scale.
But the strategy of consolidating funds, especially for the big ones, is not producing the advantages it once had, new research shows.
In fact, for some funds the economies of scale they achieve are “rather poor,” according to an article published this month by researchers Jacob Antoon Bikker and Jeroen Meringa of De Nederlandsche Bank, the country’s central bank. Low.
“The argument for consolidation still exists, but is limited,” according to the newspaper. The research comes as pension funds continue to form reconciliations and many small pension plans do, pension risk transfer deals with large insurance companies. The argument for either type of transaction is to reduce costs for every dollar or euro invested. A recent example In the United States, the consolidation is the state of Illinois’ willingness to combine more than 640 local police and firefighter pension funds after Governor JB Pritzker signed a law requiring it in December 2019.
The researchers analyzed investment cost reports from 280 Dutch pension funds from 2012 to 2019, which had previously been sent to the country’s central bank. At the end of 2019, the total value of pension fund assets in the country stood at 1.47 trillion euros (US $ 1.78 trillion), according to the newspaper.
Researchers defined investment costs as the sum of management and performance fees, transaction fees, market analysis research fees, risk management fees, and consulting fees. They noted that these costs are not always clearly reflected in pension plan reports, especially when investments are outsourced, as the fund may not even be aware of some hidden costs.
The majority of the benefits that pensions can derive from achieving economies of scale have been squeezed out, with the exception of smaller pension funds, the newspaper said.
The document showed that for the funds analyzed, the total costs per euro invested decreased: they fell from 0.54% in 2012 to 0.49% in 2019.
Management fees fall the most
From this data, the researchers found that, on average, pension funds saved 6% of total costs, or around € 751 million. Between 2012 and 2019, the economies of scale for small pension funds were around 10%, while for larger ones they were closer to 5%, according to the newspaper.
“The economies of scale in the total investment costs of pension funds are less important today than in the past, but [have] not yet completely gone, ”according to the research.
These savings are particularly applicable to management fees – the researchers found that the economies of scale for this category were 9%.
At the same time, for small pension funds, performance fees have “huge” economies of scale, up to 47%. However, the larger the funds, the closer the cost savings are to zero. In consolidated funds, transaction costs actually increased relative to those which remained low. The larger funds actually throw away their advantages of scale by investing more in high cost alternatives.
Some asset classes benefit more than others from consolidation. For fixed income and equities, the cost savings are around 5% on average. For private and real estate investments, costs increase with the growth or consolidation of pension funds.
“This unexpected result for real estate can be explained by the fact that larger pension funds have more complex real estate categories, such as shopping malls and office buildings, to which are attached management and maintenance costs. higher analysis, but where the expected returns may also be higher. The newspaper said.
A similar argument, the researchers added, may also be true for private equity.