· Comment

Consolidation: an easier way to run defined benefits pension schemes

Most defined-benefit (DB) pension schemes are now closed; they present a legacy financial and admin burden to HR rather than being part of an ongoing benefit package.

Ironically, they probably take more time and resource to operate now than they did in the past when employees were still accruing benefits in them.

And things are only getting more complicated. New rules on funding are expected next year, many schemes need to deal with the fall-out from theLiability Driven Investing (LDI) crisis that followed last year’s mini-budget and, for those lucky enough to be well-funded, the path to buying-out the scheme with an insurer, and getting it off balance sheet, is often a long and arduous journey.

The demise of defined benefits:

Fixing the issues with DB pensions schemes

UK minister for pensions promises reform

More than half a million people to transfer from DB pensions

Often, the solution to these issues has been for an employer to add a professional trustee to their scheme to help improve governance and provide dedicated pensions expertise.

However, there are other, more comprehensive, solutions – especially for smaller schemes where the resource burden may be disproportionately large – through one of the increasing number of 'DB consolidation' options that exist.

Consolidation for DB schemes comes in two main flavours. Until recently the better known of these have been the 'financial consolidators'.

These are new organisations established to hoover up schemes and run them collectively. Importantly, in return for an upfront premium, they allow employers to walk away from their commitments to the scheme, effectively offering a buy-out-like solution but without the gold-standard financial security of the insurance market.

The advantages are clear: no more scheme to worry about and no more financial risk. But, on the downside sponsors need to find a, potentially large, premium up-front and the process of joining has, so far, proved complex. Despite being well known, both financial consolidators in the market are still trying to onboard their first customers.

The lesser-known option are the 'operational consolidators'.

These arrangements again look to harmonise the operation of multiple schemes, but each employer remains on the hook for funding running costs and any deficits. And this will continue until a scheme is ultimately run-off or bought out with an insurer.

Operational consolidators offer a number of advantages for employers, especially those with smaller schemes. They generally come with dedicated professional governance arrangements, so you don’t need to worry about finding trustees anymore.

Running and investment costs can decrease, some quoting cost reductions of up to 30%. And the draw on internal resource is likely to reduce significantly in many cases.

There are some disadvantages: joining some arrangements can be quite complicated and there may be a perceived loss of control if in-house trustees are handing over the reins to a new professional trustee. Historic knowledge within an existing trustee board may also be lost. But depending on the option you choose, most of these issues are very manageable.

Increased choice in the market

The choice of operational consolidation models is increasing. They range from long-established master trusts, in which you legally transfer your assets and liabilities to a section of a dedicated umbrella scheme, to bundled 'platform' solutions offered by pensions consultancies, sometimes in collaboration with a particular professional trustee firm, where your existing scheme is simply run alongside a group of others.

Each of the many options has its own advantages and disadvantages and employers should think through what model might best serve their scheme.

In my mind, more choice in terms of operational models for DB schemes can only be a good thing. And DB consolidators, alongside traditional models, present an interesting, and efficient, third way for employers to think about.

Andrew Goddard is lead Enplan Partner at Isio