the pouchiness is the nature of the design.
if you want to redesign --well that's a lot of work.
making it smaller will make the pouch(es) smaller, but it will make its tighter, and harder to put on.
Red hot lava (a knitty.com pattern) has a similar problem.. (the back rides up and makes a pouch) many shrug patterns are not fitted, and not fitted means a pouch somewhere.
there are fitted patterns (about 4 years ago in Knitting there was a shrug.. 4 peices, 2 arms, a back shaped sort off like this --) ( and a neck band to hold it all together..
it fit like a dream.. but it was a complex pattern..
them's the choices.. easy, shapeless, (and pouchy in places)
or complex, seamed, and tailored.. (and a perfect fit!)