Alternative Thinking

The pension landscape is constantly changing through new legislation, court decisions or alterations in practice. We are always trying to find new solutions to address these changes in a practical and cost-effective way. Select on of the options below to find out more.

Alternative Thinking
  • Pension Simplification
  • Consolidation
  • What is it?

    Imagine if your pension scheme really did provide a pension based on service and salary with only one level of increase pre-retirement and one level of increase post retirement – all payable from one age. Wouldn’t running your Defined Benefit (DB) pension scheme be much simpler? And your members would have some chance of understanding their pension each year.

    Changes in legislation over the years, contracting out and the increased cost of pensions have led to benefit structures that members cannot understand, that are costly to administer and fund and that increase the chance of calculations being incorrect.

    Simplifying your scheme’s benefit structure is now possible and should be given serious consideration.

    We know certain elements of a benefit structure are expensive to insure, for example zero floor, caps and collars. The additional cost can outweigh the benefit to the member. Simplifying the benefit structure will reduce the buyout price and, for all but the smallest schemes, that reduction is often enough to pay for the cost of the exercise.

    If you and your Trustees want to ‘clean up’ your scheme, a conversion could deal with GMPs now, provide greater member understanding and engagement, reduce ongoing costs, allow greater use of technology and improve LDI matching.

    How do you achieve it?

    This will depend on your scheme specifics.

    • If it is done in the scheme, ‘actuarial certification’ would be the preferred approach because there will always be some members who cannot be contacted
    • If it is part of a move to a new scheme or new section, the consent route could be taken, along with a plan to deal with what is left behind (wind up with winding up lump sums (WULS))
    • Another option is to do it on a consent basis within the scheme but without actuarial equivalence (like an 80/20 Pension Increase Exchange offer). This will reduce the deficit but is unlikely to lead to ongoing cost savings because some members will still have the ‘old’ structure.

    What are the potential benefits?

    • Simpler administration with reduced chances of error
    • Less need for experienced pensions administration staff and greater use of self-service/automation, leading to a reduction in ongoing administration and actuarial costs
    • Easier for members to understand and appreciate their benefits
    • Ease of online member modelling 'what if' scenarios (early or late retirement or transfer values), leading to a further reduction in the need for and cost of an in-house team
    • Benefits with little or no value but difficult to insure and add to the actuarial deficit can be exchanged for benefits of greater value to members but at a lower funding or buyout cost
    • A simpler benefit structure allows better matching of an LDI strategy
    • Can lead to a reduction in the duration and hence a decease in risk/VaR
    • Simplified scheme benefit structures would be more attractive to insurers and would therefore:
      • be of interest to more providers and might jump the queue over more complex schemes
      • be easier/quicker, and hence cheaper, to quote for and to administer (if selected)
      • possibly cheaper to secure if the insurer’s ‘ability to match’ were considered when selecting the simplified structures, for example avoiding caps/collars, selecting nil and fixed increases
      • help keep the scheme attractive in a reduced buyout capacity market.

    What are the potential down sides?

    • It requires calculations for all members, so data must be clean before an exercise starts
    • Potential increase in PPF benefits and hence Levy
    • Possible impact on Lifetime Allowance for some members
    • If not managed correctly, legal and administration costs can spiral out of control.

    If you think simplification of your pension scheme may benefit you, your scheme and its scheme members, we’ll work with you to understand your goals, advise on your best approach and implement your solution for you.

  • What is it?

    The word ‘consolidation’ is becoming increasingly linked with Defined Benefit (DB) pension schemes as a way of delivering cost savings, efficiencies and potentially increased security for scheme members.

    However, consolidation can mean very different things. At one end of the scale is the relatively simple pooling of your assets with other pension schemes in the way Local Government Pension Schemes (LGPS) have been instructed to do by Government. At the other end is the removal of your employer covenant through entry of your scheme into a so-called ‘superfund’.

    Consolidation, in all its forms, can have a material impact on you, your scheme and your scheme members, including:

    • Better investment options and performance
    • Improved governance and oversight
    • Reduced running costs
    • Removal of the scheme from the employer’s balance sheet.

    Consolidation will not be the right approach for every scheme. So, if you want to explore the possibility for your scheme, we’ll explain the options available to you and the pros and cons of each against an unconsolidated approach.

    If you decide consolidation is right for you, your scheme and your scheme members, we’ll help you implement your strategy effectively and efficiently.

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