Encouraging better saving habits and strengthening the role of private and occupational pensions is "crucial" for increasing the average size of European UCITS funds, the European Fund and Asset Management Association (EFAMA) has suggested.

The EFAMA's latest report looked at the best strategy for creating bigger funds and cutting costs in Europe, noting that the significantly higher number of investment funds in Europe compared to the United States is often cited as the primary reason for the much smaller average size of UCITS funds relative to US mutual funds.

However, the report found that significant consolidation in the UCITS sector is unlikely to bring average fund sizes significantly closer to US levels.

Indeed, even in the unlikely event that Europe reduced the number of equity UCITS to US levels, the EFAMA found that the average fund size would only rise to €962m. This still falls far short of the US equity fund average of €3.1bn.

The EFAMA also argued that driving this level of consolidation was "unrealistic", with a number of barriers hindering fund consolidation, including tax treatment, regulatory divergence, local distribution agreements, language, and more.

Instead, the EFAMA said that fostering conditions that support steady growth in fund assets is more likely to reduce fund costs while strengthening EU capital markets.

Given this, it encouraged policymakers focused on competitiveness to prioritise measures that promote retail investing and private pension savings rather than emphasising consolidation.

In particular, the EFAMA said that it "strongly" believes that encouraging better saving habits and strengthening the role of private and occupational pensions, within the framework of the future European Savings and Investments Union, would be crucial for increasing the average size of UCITS.

"A key reason for the disparity in fund sizes between the US and Europe is the much larger pension savings market in the US, where mutual funds play a central role in retirement planning," the report explained.

"At the end of 2023, mutual fund assets held in defined-contribution pension plans and individual retirement accounts (IRAs) totaled USD 11.9trn, representing 47 per cent of all mutual fund assets.

"This underscores the critical role of strong pension savings systems in driving fund asset growth and reducing costs."

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