Consolidation will see just 1,000 defined benefit schemes still operating in 25 years’ time, according to a new report, but some experts doubt the appetite from government or the private sector to bring about economies of scale.
Streamlining the UK’s 5,500 schemes will slash the up to £8.5bn in annual fees paid by DB schemes, according to consultancy Hymans Robertson, meaning members will see value of 97p to the pound, rather than the current 80p.
However, the myriad calls to tackle the fragmentation of the UK universe have been met with scant action in recent years. Asset pooling in the Local Government Pension Scheme has failed to ignite copycat moves in the private sector, although the government’s white paper on DB, which is due in spring, may venture some solutions.
The costs being borne by UK DB schemes and employers are nonetheless “eye watering”, according to the Hymans Robertson report.
It found that 5,500 schemes with 10m members incur annual administration and advisory costs of £1.5bn, with asset management fees of between £5bn-£7bn.
So far, employers have not taken decisive action to reduce these. But Calum Cooper, head of trustee DB at the consultancy, said this was showing signs of changing.
“The economic interest that sponsors have in DB schemes has reached a tipping point,” he said. With the next few years expected to see those schemes with no active members become the majority, employers will want to take action.
“It feels like the time has come for DB consolidation to start to get some proper momentum,” he added.
Choose the method that suits you
Cooper predicted that the shift would take many different forms, including consolidation of governance through sole corporate trusteeship and merging schemes with simplified benefits.
It would also include changes that alter the scheme’s covenant such as buyout, or more controversially, non-insured buyout services that Cooper expected to appear in 2018.
Non-insured buyout would involve companies passing liabilities to third parties still within the pensions regime in exchange for cash, with a guarantee that the third-party would not profit until all members have been paid.
Crucially, said Cooper, it would not require the government to legislate for changes to benefits, as was proposed under the Pension and Lifetime Savings Association’s superfunds model. He said schemes should assess their own needs before deciding on a model.
Neil McPherson, managing director of Capital Cranfield Trustees, questioned whether measures such as sole trusteeship were really consolidation.
McPherson saw most merit in asset and governance pooling methods like DB mastertrusts, although he cautioned: “They are nowhere near as developed or accepted or mature as DC mastertrusts.”
Government appetite is questionable
“Making widespread consolidation of private sector schemes easier might therefore benefit from amending legislation,” said Kirsty Bartlett, pensions partner at Squire Patton Boggs, but she added that Brexit will dominate the legislative agenda for some time.
In the meantime, she suggested that the LGPS asset pooling initiative might be a “useful blueprint” for a form of consolidation that achieves most of the benefits of benefit consolidation.
McPherson agreed that asset pooling was much more realistic, although he doubted the government’s appetite for anything else: “The PLSA’s superfunds idea is a pipe dream because of the benefit harmonisation.”
Blog originally published by Pensions Expert.