Thursday, 24 May 2018

    A new solution to an old problem

    Grahan Vidler says consolidation is the only way forward for defined benefit schemes

    April brings with it a new financial year but unfortunately there are still some very familiar financial concerns facing defined benefit (DB) pension schemes. With nearly 11 million people in the UK benefit or will benefit from a private DB pension scheme more needs to be done to ensure the security of their retirement income.

    Graham Vidler, NAPF

    Graham Vidler, PLSA

    The Pensions and Lifetime Savings Association (PLSA) launched the Defined Benefit Taskforce in March 2016 and at its Investment Conference in Edinburgh this year, the taskforce launched its second report, The case for consolidation.

    Workplace Pensions Live 2017

    Graham Vidler will be discussing the PLSA’s research at Workplace Pensions Live, our flagship annual event on 10-11 May in Birmingham.

    The report outlines how consolidation and the creation of superfunds could tackle the issues facing DB pension schemes, alleviating the unacceptable, and mostly unrecognised, risk to scheme members.

    Looking at four different models of consolidation, the report made the case for greater consolidation to save scheme members money. These models include:

    1. Shared services: combining administrative functions across schemes achieving cost savings through economies of scale.

    2. Asset pooling: different schemes’ assets are pooled and managed centrally while individual schemes retain responsibility for their governance, administration, back office functions and most advisory services.

    3. Single governance: different schemes’ assets are consolidated into a single asset pool; governance, administration and back office functions are also combined.

    4. Superfund, full merger: designed to absorb and replace existing schemes. Employers and trustees are discharged from their obligations for future benefit payments which would be paid from the superfund.

    The case for greater consolidation is clear, particularly for small and medium-sized schemes. Through shared services, schemes could save an aggregate of £600m each year and an estimated minimum of £250m annually if they pool their assets. If they consolidate their governance, administration, investment and back office functions, a further estimated saving of £360m would be added, totalling a saving of at least £1.2bn a year.

    These potential savings are worthwhile and should be pursued but by themselves they won’t make much of a dent in the £400bn DB pension deficit. Superfunds offer a different type of consolidation with further potential benefits. The report makes the case that superfunds could improve the security for savers in weak schemes by reducing the probability of their schemes failing from 65% to 10% or even less. This goes much further than making schemes cheaper to run, it’s about making them last the distance.

    We believe more can be done to support the millions of people relying on DB schemes, the businesses that support them and the economy at large. It’s time to take definitive action to tackle what is arguably the most important challenge facing UK pension schemes.

    Graham Vidler is director of external affairs at the PLSA 

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