What can Australia and the Netherlands teach us about pension consolidation?
As the UK government pushes for pension scheme consolidation, dreaming of economies of scale and a dearth of domestic private investment, we look at the Netherlands and Australia for clues as to what that might look like (Reuters/Michael Kooren)
Bigger, better, faster, stronger? As the UK government goes starry-eyed over pension scheme consolidation, dreaming of economies of scale and a dearth of domestic private investment, it is worth looking to countries which are much further down the consolidation road for an idea of what such a landscape might look like.
Australia’s $4.3tn superannuation system currently ranks fourth in the world by size. By 2035, it is expected to grow to AUD8.3tn, becoming the second largest in the world.
Key features of the Aussie defined contribution system are that it is universal and obligatory at a rate of 12 per cent of pre-tax salary - and it is highly consolidated. Australia is currently home to less than a hundred pension funds. Compare that to the UK’s roughly 5,000 defined benefit and 1,000 defined contribution schemes.
Aware Super is Australia’s third-largest superannuation fund. Having been through six mergers since 2014, Aware is a veteran of consolidation. Speaking at November’s AIMSE annual conference, Aware Super’s deputy chief investment officer Damien Webb gave an insider’s perspective on what a consolidated system looks like.
In 2014, Aware Super stood at AUD40bn in size with asset management 100 per cent externalised and no allocation to alternatives. Now the fund is a heavyweight at AUD230bn in assets of which 30 per cent is invested in alternatives and private markets and external management standing at 70 per cent.
By 2030, with “a few more mergers” along the way, according to Webb, Aware Super is projected to reach AUD300-400bn in size, with internal management over half of its assets and 35 per cent dedicated to private markets.
One of the boons of the Australian system, Webb said, is a long history of private market investing: “We’ve had the good fortune to be able to develop a 20-30 year track record in venture capital, private equity etc, to demonstrate the value-add in the portfolio.”
And “private markets still have a huge long way to run”, he added, noting the growth of North American private market managers like Apollo and Blackstone since the global financial crisis, and recent 401k reform enabling greater access to alternative investments by US pension schemes.
In the UK, too, the value-for-money conversation around private markets is beginning to gain momentum, Webb said.
Chancellor Rachel Reeves believes the Australian system is a model for private markets investing, stating that Australian pension schemes invest around three times more in infrastructure and 10 times more in private equity than do the defined contribution schemes in the UK.
Her more consolidated UK pension system aims to unlock greater private market investment capabilities - though it is worth noting that consolidation alone cannot conjure the 30-year track record the Australian system is based on.
And if the aim is simply to boost domestic investment, the UK should note that within the public markets, Australian schemes are investing a decreasing proportion in Australia, as their size outstrips the Aussie stock market.
The Netherlands is another country which has been on the consolidation journey.
But Stephanie Weston, head of client portfolio analysis and management at the second-largest Dutch pension fund PGGM, said the Netherlands has “a more collective approach than other Anglo-Saxon environments”.
With a public pension scheme dating back to the post-WWII period, Dutch funds are more focused on risk sharing and longevity management than their counterparts, she said.
Since 2000 public policy has nudged the Dutch schemes towards consolidation, resulting in the number falling from around 1,000 occupational funds to 170 - and regulators are keen to see that number continue to contract.
In the Netherlands, consolidation has resulted in intense concentration, with the top two funds, ABP/APG and PFZW/PGGM, representing 45 per cent of the industry.
Dutch schemes particularly benefited from their proliferation in the 1970s and 80s, according to Weston. At a time when asset markets were taking off, “you got more bang for your buck”, she said.
Without a similar period of strong economic growth, the UK could lack these tailwinds.
Compared to their Australian counterparts, Dutch schemes have a more protracted governance process since pension funds employ an asset manager but don’t delegate investment decisions.
Dutch schemes also “don’t care about performance in the same way as in Australia and the UK”, Weston said.
While Australia is very concerned with annual return, driven by competition between schemes, Dutch pension members don’t have the option to move around and the Dutch system is not so much about collective returns as collective risk-sharing.
But the Dutch landscape is currently facing a large-scale overhaul, with all schemes required to transition to a new DC system by January 2028. In the wake of this change, “it may become more important from a regulatory perspective to think about how well these compulsory funds are doing relative to one another”, Weston said.
So far in the UK, the regulatory focus seems to be on investment input, Webb observed.
Through schemes such as the Mansion House Accord, “the government wants more investment in the UK, more productive risk-taking ventures”. On the other hand, the push in Australia has been on outcomes, like scale benefits and value for money.
As the UK moves along the road to consolidation, he predicts: “I think you’ll start to see the regulatory framework focus more on the output.”