Number of UK Defined Benefit schemes to shrink to less than a fifth of today’s c5,500 in 25 years’ time due to consolidation
09 Feb 2018 - Estimated reading time: 3 minutes
The number of DB schemes in the UK will shrink to about 1000 – less than a fifth of current levels - over the next 25 years as DB consolidation, in a whole range of forms, takes off. The prediction comes from Hymans Robertson, the leading pensions and benefits consultancy, in its white paper “DB Scheme Consolidation – a better future for members and employers”, launched today. This will be as a result of the drive to reduce running costs, improve the security of members’ benefits and manage risks more effectively.
That means, that over the next 25 years we’ll see:
- The number of schemes fall by 4/5ths: a drop from c5,500 to c1000
- 90% less benefit sections within schemes: 40,000 benefit sections1 will reduce to c.4000,
- A 93% drop in the number of trustees: From c30,000 to around c2,000
- Assets will be around 1/2 of today’s £1.5trn: still a sizeable c£700bn
- The combined UK deficit should shrink by 3/4s from £800bn to £200bn
Commenting, Jon Hatchett, Partner at Hymans Robertson, said:
“Contrary to popular belief this doesn’t need legislative change to happen. It’s already happening. Along this road we’ll see the popularity of consolidation solutions such as sole trusteeship, DB master trusts, investment platforms and other ‘mid game’ consolidation vehicles take off. We’ll also see new innovations enter the market, ranging from non-insured risk transfer vehicles to superfunds.
“Ultimately these moves should improve the security of people’s pensions as well as reduce costs for employers. We’re reminded all too often that DB pensions are not ‘gold-plated’ or ‘guaranteed’, and there is a real risk for a significant minority that they won’t receive their benefits in full. We have seen hundreds of schemes enter the Pension Protection Fund, with pain for scheme members, employees and shareholders alike. The plight of the Carillion pensioners is a recent high profile reminder of this.
“From the perspective of employers, the cost of sponsoring DB schemes has been eye-watering. They’ve paid hundreds of billions of pounds in deficit contributions and on average seen deficits continue to rise. It’s not hard to see why they’ll be looking for a different approach to reducing costs and managing risks more effectively.”
Discussing the moves we might expect to see in the market, he added:
“In terms of the members of these schemes, we could see around 1m consolidated into DB Master Trusts. These are already popular in the DC space, but they already exist and are gaining ground in DB too for similar reasons: reducing cost and improving governance. Our estimates suggest around 2m members will reach the ‘end game’ and move into the ‘gold standard’ of consolidation vehicles: buy-outs with insurers. Along the way we would also expect around another 500,000 to fall into the PPF, and around 1m transfer out of DB following the freedom and choice reforms.”
Concluding he said:
“Better outcomes for DB scheme members and sponsors requires a change in approach. For the majority the focus should be on becoming more resilient to bad outcomes. This resilience has been most notable by its absence. As an industry we do not seem to have learned our lesson. There are still vast and unnecessary levels of risks in the system – to the tune of £400bn2. There is no obvious barrier to reducing this affordably and should be the priority for the industry. It would improve security in the system by £250bn3 - transformational for both scheme members and sponsors.
“In contrast, administration and advisory costs for the entire industry are in the region of £1.5bn pa. Asset management fees are higher, in the region of £5bn to £7bn pa. So the costs of running these c5,500 schemes and providing benefits to over 10 million members are substantial. But set against a buy-out deficit of over £700bn, while cost savings will help, they will take a very long time to make a real dent. Consolidation, in all its guises, will definitely have a role to play in moving us towards a better future for DB schemes, their members and sponsors.”