US-based Parametric Portfolio Associates has released a new paper titled Scale versus segregation: Breaking through the retirement solution impasse.
The paper’s author, Parametric director of research and after-tax solutions Raewyn Williams, said that traditionally super funds have pooled their accumulation and pension assets to take advantage of economies of scale.
“However, the rapid growth of pension assets is making it harder to ignore more customised pension solutions just to preserve scale benefits.
“Most funds believe they would have to sacrifice economies of scale benefits to segregate assets into two separate accumulation and pension pools, and then design targeted solutions for each,” Ms Williams said.
This could mean carving out separate mandates and potentially the addition of new managers, Ms Williams said.
The solution could be a US-style ‘centralised portfolio management’ (CPM) approach, she added.
"Our experience with CPM shows that you can implement active manager positions in a centrally coordinated way by taking a daily data feed of a complete set of active manager recommendations (hypothetical positions which are not cash-backed) and creating a single real, cash-backed equities portfolio.
“With ‘pension CPM’, the accumulation mandates become the template for a single pension CPM portfolio, but a fund can tailor the solution for pension objectives within the CPM portfolio, without changing the existing accumulation mandates,” she said.
Such an approach would avoid many of the drawbacks of a standard approach to segregation, Ms Williams said.
“It avoids the multiplication of managers and strategies within the fund’s equities allocation,” she said.
“Using CPM to solve equity funds' pension phase problem seems to be a way to maintain the scale benefits of existing arrangements as well as seek to provide a custom solution targeting the needs and objectives of pension members.
“You still have the relationships with the existing managers and the scale that underpins those relationships,” Ms Williams said.
