The majority (72 per cent) of Canadian pension funds said they’re currently focused on consolidation options that offer greater certainty they’ll be able to meet their liabilities, according to a survey by CIBC Mellon.
It also found 50 per cent of pension funds surveyed plan on implementing consolidation plans over the next three to five years. The same percentage (50 per cent) of respondents that said they’re considering merging other funds’ assets into their owns plans believe the move will require them to cope with greater scrutiny. However, they also recognize it could provide significant benefits such as the ability to tap into economies of scale and regulatory effectiveness.
“Asset owners and asset managers alike face rising pressure from stakeholders, increasing market complexity and growing competition for opportunities,” said Ash Tahbazian, CIBC Mellon’s chief client officer, in the company’s report on its survey findings. “The pursuit of scale and its ability to support greater focus and expertise — whether by growing assets or by tapping into specialized providers — will likely continue to accelerate.”
CIBC’s report found Canadian organizations have launched different structures to enable asset management consolidation. Most (72 per cent) pension funds surveyed said they consolidate by using an annuity purchase or other liability risk transfer, while 26 per cent said they’re considering this option. And 52 per cent of those surveyed said they’ve hired a pension or government entity to manage their assets, while 34 per cent are considering doing the same. Of note, 26 per cent merged with or into another plan, asset owner or pension entity, while 20 per cent are considering this move.
Meanwhile, 26 per cent of funds surveyed are managing assets on behalf of other institutional investors, with 18 per cent also considering doing the same. And another 18 per cent of respondents are incorporating or merging other pension assets, liabilities or operations into their own plan, with the same number considering this option. The survey also found 32 per cent of pension funds are considering hiring an outsourced chief investment manager and 48 per cent of respondents said they already use one.
More than half (61 per cent) of the pension funds surveyed pointed to the possibility of securing economies of scale in a merged entity as the main reason for adopting the strategy, while some 44 per cent suggested larger funds may also be able to manage regulatory responsibilities more effectively.
About a quarter (28 per cent) of respondents said they believe consolidation via a merger might be an opportunity to improve the way pension funds make use of data, while 17 per cent said they think consolidation could make it easier to plan expansion into new asset classes and regions. As well, 33 per cent of respondents pointed to strong governance and 17 per cent cited stronger talent recruitment and retention as potential reasons for considering consolidation via a merger.
However, the survey found challenges to incorporating or merging assets into another pension fund, asset owner or entity, including: greater scrutiny and visibility (39 per cent), cultural differences (26 per cent), technology issues (17 per cent), lack of management buy in (13 per cent) and data management and exploitation (four per cent).
Notably, the same challenges exist for pension funds considering incorporating or merging other pension assets, liabilities or operations into their own plan, with respondents listing greater scrutiny and visibility (50 per cent) as the top challenge, followed by technology issues (28 per cent), cultural differences (11 per cent), lack of management buy-in (six per cent) and data management and exploitation (six per cent).