In this, the sixth and final feature in our series of articles on ‘pension scheme consolidation’, we set out a case study, based on a real life pension scheme, to illustrate how one particular pension scheme consolidation option could work in practice.
This case study looks at the considerable attractions of using consolidation into a master trust in order to simplify benefits and, at the same time, address the recent requirement to equalise benefits for the effects of Guaranteed Minimum Pensions (GMPs). GMP equalisation is achieved by converting GMPs into ordinary scheme benefits meaning that complex rules relating to GMPs fall away after equalisation and conversion.
COMBINING CONSOLIDATION AND SIMPLIFICATION – STEP 1
The employer in our case study set up its own defined benefit (DB) pension scheme many years ago. A decision has been made to transfer the assets and liabilities of that scheme to a master trust; i.e. another occupational pension scheme that is:
- used by more than one employer; and
- not used only by connected employers.
In effect, the existing scheme will become a distinct section in the replacement master trust which has a single trustee board responsible for stewardship of all the assets and management and oversight of a common administration platform and set of advisers.
The rational for this form of consolidation is explained in the third article in the consolidation series.
At the same time, the employer decides to use consolidation as an opportunity to simplify scheme benefits which have over the years, due to pension scheme restructurings, corporate transactions, etc., become increasingly complex.
In other words, a bulk transfer from the employer’s scheme to the master trust (without members’ consents) is agreed – Step1 and, after that transfer takes place scheme benefits in the master trust are simplified (but the actuarial value of the benefits remains the same) – Step 2 below.
COMBINING CONSOLIDATION AND SIMPLIFICATION – STEP 2
That part of the master trust attributable to this employer scheme comprises three main benefit sections as well as two small sections (not illustrated), with fewer members, as well as a number of members with individual benefits. The details of the main section benefits are given below.
The aim of the conversion is to convert every member of the scheme into one simplified structure below, which has no GMP element (it having been converted into scheme benefits). This level of standardisation aids member (and trustee / employer / administrator) understanding of benefits and helps planning. The structure also brings the potential for administration streamlining and significant cost savings.
This is just one example of the application of ‘consolidation’; in this case, consolidation into a master trust combined with simplification of pension scheme benefits which, together, provide financial, administrative and practical benefits to the sponsor and members of the scheme.
For further information or examples of other forms of consolidation, see previous articles or get in touch with your usual JLT EB contact or our Head of Technical, John Wilson