REWARD
DB schemes consolidation
Chris Parlour, head of employer engagement at Stoneport Pensions , discusses the challenges
S maller defined benefit (DB) pension schemes face a multitude of challenges, from keeping up with ever-changing legislation and regulatory guidance, to protecting their members from pension scams and ensuring good governance generally. On top of that, smaller DB schemes suffer from huge diseconomies of scale, with running costs that are typically a multiple of those that large schemes pay for the same services (when expressed on a cost per member basis). It is no wonder that consolidation is such a hot topic in the industry.
Alleviating the pressures Consolidators typically benefit from a more professional set up than a smaller DB scheme running alone, which makes them better able to adapt to changes in the regulatory environment. They can also leverage their size to embrace technology and engage communications specialists to educate and inform their members, helping them to guard against pension scams and facilitating better decision making more generally. Often a consolidator will have professional independent trustees too, ensuring the highest standards of knowledge underpin their operation. Good governance can deliver significant financial benefits. Academic studies cited in the Department for Work & Pensions’ white paper Protecting Defined Benefit Pension Schemes (https://bit.ly/3hh9JBj) showed that good governance through effective investment can add between 1% and 2% per annum to returns. Where benefits are secured in bulk, rather than for each of the smaller schemes individually, consolidation can also offer significant endgame buy-out savings. These savings are on top of the reduction in running cost that consolidators can achieve by bringing schemes together, to spread the fixed running costs over a much larger number of members. As well as cutting costs, consolidation can also reduce risk, through increased diversification of the assets and more sophisticated liability matching. Some of the newer solutions in the market, as well as the traditional insurance company buy-out option, also offer improved benefit security to members. The number of consolidation options in the market and the range of benefits they offer is growing. Any trustees and employers considering consolidation as a way of addressing the challenges their schemes face will need to carefully weigh up all the options before making their move. n
in particular. The pandemic has placed additional pressures on trustees and employers already struggling to keep up with new rules and regulations. It is no wonder that some smaller DB schemes struggle to satisfy the Regulator’s high expectations when it comes to good governance. ...a significant amount of ‘fixed cost’, affecting smaller DB schemes disproportionately Diseconomies of scale Meeting the regulatory and governance challenges DB schemes face comes at a cost. DB schemes of any size employ a host of advisers, including actuaries, administrators, investment consultants and lawyers, to help them navigate the increasingly complex pensions landscape. Many tasks that need to be performed, like undertaking triennial actuarial valuations, or preparing annual accounts, give rise to a significant amount of ‘fixed cost’, affecting smaller DB schemes disproportionately to larger ones. Smaller DB schemes with less than 1,000 members typically spend well over £1,000 per member each year, which is highly inefficient in the context of paying an average pension of around £5,000 per annum. Employers have to shoulder these costs for every member, even those not yet in receipt of a pension, some of whom may not see a penny from their scheme for more than twenty years. Meanwhile, large DB schemes, with more than 5,000 members, spend an average of less than £200 per member each year.
Evolution of the regulatory landscape
There have been more than 1,000 new pieces of pensions legislation since the turn of the millennium. This year has already seen the Pension Schemes Act become law, whilst a second consultation on The Pension Regulator’s (‘the Regulator’) new funding code is due in the autumn. Even the amalgamation of ten existing codes of practice, which is currently under consultation, could lead to additional duties being placed upon trustees. The dangers toDB benefits Since freedom and choice was introduced in 2015, pension scams have become an increasing problem. Action Fraud (https://bit. ly/3eBuk1B) has reported that £1,800,000 was lost to pension fraud in the first three months of 2021 alone. Trustees are being urged to do more to help protect members, but also risk legal action if they fail to pay a transfer of DB monies quickly enough. To give trustees the power to block suspicious transfers, yet more new legislation is expected in the autumn. The governance burden Whilst a strong governance framework is entirely necessary and appropriate – to protect members’ retirements – it places a very heavy burden on smaller DB schemes
| Professional in Payroll, Pensions and Reward | June 2021 | Issue 71 32
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