There is a steady stream of news clips these days telling us that some Canadian pension plan has brought something somewhere in the world - an airport, shopping mall or even a theme park! This is evidence of the ‘Canadian system’ in action. 

According to CEM data, over the 10 years to December 2017, Canadian pension plans outperformed their strategic benchmarks by an average of 27 bps after costs. By contrast, US public funds achieved an average of 2 bps and European funds just 1 bp of ‘net value added’. 

These results are driven by a few very large Canadian funds that have, over a sustained period, developed the capability to invest directly, building their internal teams in order to bypass traditional money managers where it suits them. Success has been achieved in private markets in particular, where the costs involved in direct deal making are significantly lower than when investing through General Partners (GPs) or in fund-of-fund structures. 

Building the capability to buy and own assets directly is tough though, and few pension plans globally have the scale, vision, skills or audacity to ‘spend money in order to save money’.  The Canadian pension funds working in this way are big – and we need to be thinking of scale in terms of £50 billion as a minimum, and £100 billion more realistically, to even contemplate making the leap.  

The key lesson for UK funds is that size matters and we need to re-frame what constitutes a ‘big’ pension fund.

Much like the UK, the Dutch pension system has minimum solvency standards. What’s different is the interplay between funding and the pension promise within Dutch DB pension schemes that are forced to cut pensions in payment when funding falls below certain thresholds.  

Clearly that’s a bad thing if you’re a pensioner but it serves an important purpose – it’s an effective way of making DB sustainable. It means that responsibility for funding deficits doesn’t fall solely on employers, active members or taxpayer shoulders in the form of higher contributions. Everyone shares the pain and this addresses some of the inherent intergenerational unfairness we see in some pension systems. 

The Dutch system influences behaviour amongst pension funds in a number of interesting ways. Notably, it absolutely focuses public attention on the solvency and results of pension funds.  There is barely any aspect of scheme management that isn’t scrutinised, from investment strategy to costs and service delivery. It is no surprise that the global transparency ‘push’ started in the Netherlands.

Dutch funds have to work extremely hard to convince a cynical public about the efforts being made on their behalf.  If you are going to cut pensions then you had better be damned good at explaining why. With this in mind, levels of investment in pension administration are significantly higher amongst Dutch funds – and they deliver an overall better experience for their members as a result. 

In the CEM database the larger Dutch funds spend around £60 per member on pension administration. This is broadly twice what CEM sees amongst equivalent funds in the UK and the extra spend translates to better results. Overall the level of service is much higher as Dutch funds develop sophisticated strategies for interacting with members.       

To understand the future shape of the UK pensions market it’s helpful to look at what is happening in Australia - because we seem to be following the exact same path and are roughly 10 years behind.

First up, the ‘tail’ of DB liabilities has really been eliminated in Australia. Almost every fund is DC, every employer pays the same level of contribution and industry consolidation has been huge. 

Just as accountability forced standards up amongst Dutch funds, so competition and the search for value-for-money for the consumer has improved efficiency and standards in the superannuation (‘super’) system.

One of the most important recent breakthroughs though has been ‘Superstream’ - a mandatory system developed by the Australian Tax Office that requires employers and funds to send contributions and data electronically.  Superstream has a number of applications:

·       Employers can make all their contributions in a single transaction with fewer errors, even if they are transmitting to multiple super funds.

·       It is also used for transfers between funds, speeding up and simplifying the process for members in switching from one DC fund to the next.

·       Members can find and be reunited with lost accounts and unclaimed monies much more efficiently.

Pensions nowadays is a truly international industry where we all have something to learn from one another. We should all take a little time to discover what is working, and why.