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What does consolidation mean for defined benefit pension plans?

What does consolidation mean for DB pension plans?

As the old joke goes, ask two actuaries a question and you’ll get three answers. Ask them what consolidation means for defined benefit (DB) pension plans and all three answers might be right.

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What does consolidation mean for defined benefit pension plans?, Illustration of clickboard with three options

There is a lot of industry and political talk about the merits of consolidating pension  schemes right now. In particular, we’re hearing about the potential benefits for smaller schemes, namely lower costs, improved governance and more efficient investment strategies.  Undoubtedly, there are a large number of schemes that lack economies of scale and could benefit from some form of consolidation.

Consolidation is a broad church and encompasses a range of solutions, both existing and new.  So which solutions are right for you? First ask yourself ...

What do you want to achieve?

Pension plans and sponsors might have a number of objectives which consolidation could help achieve:

  • Reduced running costs
  • Less management time
  • Better service for members
  • Improved governance
  • More sophisticated and more efficient investment strategies
  • De-risking

On the face of it, these all sound positive, but trustees and sponsors need to decide what their biggest gaps or concerns are.  Maybe running costs are too high or well above benchmark norms? Perhaps trustees don’t have the bandwidth to do everything – or maybe it’s difficult to find trustees in the first place? Perhaps the sponsor wants to bite the bullet and de-risk the plan rather than face the open-ended costs?

The particular objective or objectives will determine the particular solution you pursue.

There are two different categories of consolidation. They overlap, but offer fundamentally different end-games for employers (initially at least).“Operational consolidation” focuses on efficiencies in the day-to-day running and governance of a plan. “Financial consolidation” goes a step further and sees a third party take on financial responsibility for the plan instead of the employer.

Operational consolidation options

Almost any form of bundling services or outsourcing can deliver operational efficiencies.  But typically, operational consolidation can involve one or more of the following four options:

  1. Consolidating advisers: Bundling services with fewer advisers can save time and costs.
  2. Pooling investments: Using a fiduciary manager of an investment platform solution can enable access to more sophisticated and more efficient investment opportunities.
  3. Appointing a sole independent trustee: A sole professional trustee can streamline management, reduce costs and provide strong governance.
  4. Joining a pensions platform or  DB master trust: The highest level of outsourcing where governance, advice and investments are all run collectively across a number of schemes but whilst retaining the employer responsibilities in full.

Master trusts and pension platform solutions are managed by professional organisations who take on the trustee role and with an existing team of internal and external advisers. For example, the Enplan Pension Platform is managed by Entrust Pension Limited acting as sole trustee, with support from KPMG as adviser to the plans.

Financial consolidation options

Financial consolidators aim to achieve the same efficiencies as operational consolidators, but also allow the transfer of risk away from the current scheme sponsor to a third party.  Insurance buy-out providers are the obvious example here – together with the Pension Protection Fund (PPF) where the sponsor has failed.

However, a new option is emerging in the form of ‘superfunds’, which aim to remove risk for the sponsor at a lower cost than buy-out – albeit still with a significant upfront cost.  In the right circumstances, they could provide better security at lower cost than the alternatives.  For more information see our guide to superfunds.

Conclusion

Consolidation really is a case of horses for courses.  With the wide range of options out there, trustees and sponsors need to decide on their objectives first.  Then they can look at the options that could meet those objectives, whilst dealing with any vested interests of advisers or even trustees.  Without a doubt there are many pension plans which could be more efficient and effective if they take advantage of consolidation.

 

Webinar: Superfunds

Date: Wednesday 19 September at 13:00

We will be hosting a webinar dedicated to superfunds.  During the session representatives from KPMG's pension practice will provide commentary on key issues related to superfunds and answer any question you may have. Click here to register. 

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