DB scheme consolidation: an option for schemes of all shapes and sizes
09 Feb 2018 - Estimated reading time: 5 minutes
A common misconception is that consolidation is the preserve of small schemes. In reality, consolidation isn’t just a small scheme issue, but the costs and under-regulation of smaller schemes have pushed consolidation up industry’s agenda.
The sense that TPR wasn’t watching has led to cost saving being prioritised over proper stewardship for some schemes. TPR is about to address this, which will turn up the heat for trustees and sponsors of smaller schemes. No new legislation is needed, this is regulation within the current framework.
Size doesn’t always matter
Interestingly the 2017 Purple Book shows that smaller schemes are no worse funded. Schemes of all sizes are around 2/3rds funded on buy-out (in fact, schemes with under 100 members are doing better than the rest, at 72% funded on buy-out). This is despite TPRs’ 2014 research showing running costs are six times higher per member for schemes with under 100 members compared to schemes with over 5,000 members (£1,054 pa versus £182 pa).
Since members don’t seem to be suffering, this issue rests with the sponsors who underwrite the risk and pay the bills. This makes sense, since a scheme is simply a sponsor’s vehicle for delivering the pensions part of their remuneration package to past employees.
Faced with stiffer regulation these sponsors will have two choices: run your scheme properly or use one of the existing consolidation solutions to do it for you. You can read more about the latter in my previous blog . Costs are likely to be the deciding factor and an exodus to existing solutions is brewing. The few who decide to go it alone will do so because they want to keep control and are willing to pay for it.
As things stand today, smaller schemes can have superb online analytics and tailored advice. It’s a question of price and demand. My firm already provides these services to stand-alone smaller schemes and to existing consolidation solutions. The only change that’s needed is with the trustees and sponsors buying services. TPR’s 21st Century Trusteeship campaign is pushing in this direction, but it needs the decision makers to get engaged.
Finding the shape to fit
Consolidation comes in many different flavours which can benefit schemes of all shapes and sizes. The table below sets out a range of consolidation options and the challenges they can help meet. Green indicates that for a typical scheme you would expect costs to reduce. Amber reflects that cost savings may or may not be achieved - it is very scheme specific. Red suggests no reduction in costs.
The large number of amber lights reflects the fact that different schemes have different needs. What this landscape looks like for your scheme is worth closely considering in light of what each option is, and their pros and cons. You may rightly reach a different picture for your own scheme, but we believe consolidation can help all schemes in some form and we expect its role in the future of DB will only grow.