Pension Scheme Consolidation

07 July 2017

The FCA in its Final Asset Management Market Study Report highlighted consolidation as a key step, with a “recommendation to DWP [Department of Work & Pensions] to remove barriers to pension scheme consolidation and pooling”.  Within the report the FCA comment:

“For DB [Defined Benefit] schemes, we agree that some schemes might be able to benefit from pooling through lower fees and wider choice. However, there are barriers to DB pension scheme pooling, in relation to complex rules concerning changes to existing benefit structures as well as the responsibilities on trustees and sponsors and certification requirements. Some stakeholders also told us that greater transparency and reporting, for example, explaining in their annual scheme report why they didn’t consolidate could be an effective measure. We have found that removing some of these barriers could encourage the practice of asset pooling, allowing smaller pension schemes to benefit from economies of scale and exert greater pressure on asset managers. This would require changes to legislation and the issuing of further guidance to trustees.”

This is very laudable; however can’t we already do this?

The answer is yes and we asset managers have been passing the benefits of pooling to clients for many years.  This has been achieved by 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.  Aggregation also allows small schemes to invest in funds and asset classes that they may, because of their size, be unable to access directly.  Finally because the holdings are typically written as a life policy it also delivers significant VAT advantages for the scheme.

So consolidation is here, without any concerns over cross subsidies, support to less viable and unconnected employees and preserving the integrity of the scheme rules and provisions.

So pension schemes don’t need to wait for the “DWP to remove barriers”, you can embrace consolidation now.

Contact:

Phil Wadsworth, Chief Actuary | T: 0161 242 5321 | E: phil_wadsworth@jltgroup.com

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