With the traditional UK Defined Benefit (DB) pension scheme model being very complex and encompassing several challenges, many are now considering other options.
In 1974 James Dyson bought a vacuum cleaner and rapidly became frustrated with it. Its conventional design meant it soon became clogged with dust and unusable. He saw how sawdust was removed with industrial cyclones at a local saw mill, designed one to fit a vacuum cleaner and the rest (as they say) is history. So much so, his approach is now the most popular design in the market.
What does this have to do with pension schemes? Well, we believe a similar innovative shift is likely in the pensions market in the next few years, with alternative governance and operational models starting to gain real traction. The trend of appointing professional trustees will continue, but many schemes may move further to sole-trustee, “pension platform” or master-trust type options. The apparent Government support of consolidation models, as discussed in the Department of Work and Pension’s (DWP) recent Green Paper, will only accelerate this transition.
UK DB pension schemes are complex financial instruments. Moreover, they are often, effectively, managed by volunteers. If you were designing a governance model from scratch, you wouldn’t start from here.
Some key issues with the traditional governance model include: finding lay trustees with the right skills; the time commitment for the sponsoring employer - either through pulling trustees away from their day job or direct management involvement; rigid quarterly trustee meetings can lead to inefficient decision making and missed opportunities; and running smaller schemes as independent entities is hugely inefficient.
Some of these issues have been recognised by the Pensions Regulator (and DWP) who has looked to increase training and education for lay trustees. While this is part of the solution, numerous schemes could benefit further from the use of a professional, independent trustee.
A professional trustee brings knowledge of all key pension issues without the need for further education or training. When added to an existing board, they can also guide lay trustees to make better decisions. However, it doesn’t necessarily reduce management time or adviser costs.
The model can be taken further by employing a sole professional trustee. This approach has been in use for a while for some schemes nearing their “end game”. However, there is now a growing trend amongst “ongoing” schemes to go down this route to improve governance and decrease adviser costs.
The ultimate evolution of the sole trustee model involves consolidation - one trustee using one advisor to advise multiple schemes operating under one umbrella – with its popularity increasing.
Typically, the existing trustees are replaced by a sole professional trustee. The scheme can preserve its own trust status (under a platform approach) or is wound-up and transferred into a larger scheme (under a master-trust).
All advice is delivered to the new sole trustee responsible for all the schemes in the arrangement. This means common issues can be discussed once and implemented across all affected schemes. The advice is continuous and not restricted to a meeting date cycle.
Additionally, the adviser uses technology to deliver advice cost-efficiently. For example, it is possible to use online models to perform actuarial valuations, investigate assumptions, adapt investment strategy etc. This can be discussed and agreed in one meeting without paperwork and delivered at low cost. Assets are separately identifiable by scheme but consolidated for “bulk buying” with fund managers providing further cost savings.
We have direct experience of this new model having acted as advisors to the “Enplan Pension Platform”, a solution run by professional trustee Entrust, where KPMG provide actuarial, administration and investment advice. We believe schemes on this platform are receiving an enhanced and more efficient service, but at significantly reduced costs. In our experience, there is no reason why this approach, for appropriate schemes, cannot reduce adviser costs by up to 40% without affecting quality or speed of decision making - in fact both are generally improved in our opinion.