Partnerships Offer Allocators a Long List of Benefits. Why Aren’t There More?

Even though consolidation is rising overall, it’s still less popular in the U.S.

Fiona Goodall/Bloomberg

Fiona Goodall/Bloomberg

Allocators need to band together, whether through mergers or loose partnerships, if they want to lower costs, get access to the best managers, and come up with better investment management solutions.

One obvious benefit of consolidating with industry peers is the ability to split the costs of operational staff and data tools, according to Melanie Pickett, Northern Trust’s head of asset owners in the Americas. Some allocators, especially the smaller ones, are already having a tough time filling operational roles as wages rise as the result of inflation, she said.

Although Northern Trust has an interest in consolidation, as it offers outsourcing services, allocators are clearly combining in increasing numbers. There were 15 mergers in 2020 and 2021 among allocators in Australia alone. In November 2020, more than 30 percent of European pension plans indicated that they had consolidation plans in the next one or two years.

The need for data and technology is a big driver as allocators increasingly engage with investment managers on their performance and strategy. Allocators can collect data faster if they use a standardized system to assess managers. They can send the same questionnaires to managers about capabilities, such as environmental, social, and governance practices. “It reduces friction,” Pickett said. Big investors can also more easily afford data science tools so they can better understand what managers are doing at any given point in time and how they are achieving results.

In a recent white paper from Northern Trust, Pickett and her colleagues also argue that consolidation helps asset owners become more flexible in allocating to less liquid assets. That makes these investments less risky. “You want to be sure that the illiquidity is a small part of the plan,” Mark Austin, Northern Trust’s head of asset owners in the U.K., wrote. “If you are in a much bigger plan, because you have more harmonized flows in and out, you can afford to put illiquid assets in place because you have greater access to other liquid assets.”


Even though consolidation is rising overall, it’s less popular in the U.S. The most notable effort is the Pension Consolidation Act passed by the state of Illinois in 2020, which merged 649 fire and police pension schemes into two new funds. According to David Neuenhaus, global head of asset management at KPMG, the U.S. lags behind other developed economies due to a lack of certain infrastructure that would make the most out of pension mergers.

“If you have one big, unsophisticated organization merging with another big, unsophisticated organization, you just get a much bigger unsophisticated organization unless the merger also serves as a catalyst for strategic and operational improvement,” Neuenhaus said. When consolidation happens, the change of management or culture is often more costly in the U.S. than it is elsewhere, he added. U.S. pensions are “less sophisticated” in the sense that they lack in-house investment teams and tend to focus more on short-term investment results, which reduces merger synergies, he said.

Pickett agrees that consolidation isn’t for every pension plan. For example, allocators that want to work with small emerging managers or adopt niche investment strategies should try to avoid consolidation. “Having a large consolidated portfolio means your ticket sizes are typically much bigger,” she said. “It does limit the type of investment opportunities that you would go into.”