Consolidation is the latest “hot topic” in the world of pensions but what does it actually mean and what are the different forms it can take? This is the first in a series of papers where we will explain the options for DB schemes, of any size, to consolidate and then explore these options in more depth to help you understand if consolidation could improve how your scheme is run.
According to the Pensions and Lifetime Savings Association (PLSA) DB Task Force the current number of schemes (circa 6,000) is too many and, “to set the DB pension system on the road to sustainability … consolidation is at the heart of the solution”. It has even been suggested that the 5,500 smaller DB pension schemes, with less than 5,000 members, be consolidated into 500 larger schemes.
More recently, the Government’s White Paper on DB pension schemes recognised the benefits of consolidating DB schemes and a consultation has been promised this year on –
- a legislative framework and authorisation regime within which new forms of consolidation vehicles could operate; and
- a new accreditation regime to build confidence and encourage existing forms of consolidation.
So, consolidation is firmly on the DB agenda but what does ‘consolidation’ actually mean?
Firstly, it is important to recognise that there is a wide spectrum of consolidation options from simple pooling of pension schemes assets to so called ‘superfunds’ enabling consolidation in which an employer no longer sponsors their DB pension scheme.
Main Consolidation Models
Secondly, the process for turning each option into a reality is quite different as is the impact on the scheme and its members. However, the impact can be material and could include:
- Better investment options and performance
- Improved governance and oversight
- Reduced running costs
- Removal of scheme from the employer’s balance sheet
In the next article in this series on consolidation, we will to look at pros and cons starting with the forms of consolidation that are available now. This will help you decide if consolidation is right for you and if so what which form is right for you – it is important to remember that consolidation can be gradual and by taking steps towards it can help you find the best final strategy for you.
Of course, consolidation will not be right for all schemes and it is wrong, for example, for government or anyone else to assume all small schemes are being poorly governed. One type of consolidation does not “fit all”.
Our second article in this consolidation series will look in more detail at Investment Pooling, a solution which grabbed headlines in 2015 when the government announced its intention make local government pension schemes in England and Wales pool assets into a small number of ‘superfunds’ to deliver cost savings and efficiencies.
In the meantime, we hope you find this article of interest and if you require any further information on how consolidation might work for your DB scheme, please contact your usual JLT Consultant or our Head of Technical, John Wilson.