Defined Benefit Scheme Consolidation - The Options: ‘Sharing’

SUMMARY

In our first article on pension scheme consolidation, we introduced the subject, explained why it is so topical and, recognising that consolidation has many interpretations, provided an overview of the main consolidation options.

In this, the second article in our series, we begin to ‘drill down’ and look at those options in more detail, starting with ‘sharing’; that is, sharing of services and pooling of pension scheme assets.

SHARED SERVICES

In terms of the range of consolidation options, the merger of administration services is probably the one that is most understood and used.

Implementation of shared services can be achieved in a number of ways. However common examples are trustees of schemes entering into contracts with large third party administrators (many of whom provide a ‘full services’ offering) and group procurement, through the collaboration of two or more schemes, to obtain administration and advisory services together. Services offered would normally include at least the following –

  • scheme administration and governance
  • pensioner payroll
  • accounting
  • communications
  • technical support

The savings available from the shared services consolidation model would depend on a number of factors. However, the following extract from a recent research paper is instructive –

“The average difference in cost per member for both administration and advisory services (excluding investment) between the largest schemes (5000+ members) and smallest schemes is £566; the difference between the highest and lowest costs paid in the smallest and largest schemes respectively is £1,672 per member, according to TPR research1”.

Of course, the shared services option has its challenges and those that are most commonly cited include –

  • upfront costs
  • aligning the interests of distinct employer and schemes
  • differences in benefit structures
  • loss of control

In some cases, these challenges may prove insurmountable so the importance of proper due diligence cannot be overstated.

ASSET POOLING

Under this consolidation option, the assets of multiple pension schemes are consolidated into asset pools. This option has been available for many years with asset managers passing the benefits of pooling to clients by the use of investment platforms whereby pension scheme clients can hold their specific investments on a unitised basis. Because these are aggregated with those of other schemes, everyone enjoys the benefits of charges appropriate to the total assets and not those applicable to their individual (smaller) assets – potentially creating a saving.

Lets talk - Consolidation to shared services and investment

Aggregation also allows small schemes to invest in funds and asset classes that they may, because of their size, be unable to access directly.

As a consequence, asset consolidation can already be achieved without any concerns over cross subsidies and support to less viable and unconnected employers through liability consolidation.

Equally, this preserves the integrity of the scheme rules and provisions and the visible support of the sponsor.

COMMENT

Sharing of services and pooling of assets can be adopted individually or, to achieve greater integration and efficiencies, they could be combined.

Adoption can be achieved whilst retaining separate schemes and trustee boards or the schemes could merge into a single trust (either one of the existing schemes or a new scheme could be established).

Merging of schemes, popular with employers in the same group of companies, achieves a further layer of integration.

No changes to legislation are needed for these forms of consolidation and the same can be said about the next model on the ‘consolidation spectrum’ – the master trust scheme, which we will consider in depth in our next article.

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.