Summary
The Defined Benefit (DB) Taskforce has released its second report, which focusses on consolidation of pension schemes. This report focusses solely on consolidation, to varying degrees along the lines mentioned in the Government’s Green Paper, potentially consolidating:
- administration,
- investment of assets,
- governance and, ultimately,
- liabilities, in “Superfunds” having broken the link to the sponsoring employer.
The Taskforce notes that the consolidation under the first three models can be achieved already under existing legislation.
Model 1: Schemes sharing administration services
The driver for this suggestion appears to be that costs per member are higher for smaller schemes. While the report suggests some reasons why this might be the case, it ignores the main one, which is that certain services – such as preparing the Trustees’ report & accounts – involve work that is not proportional to the number of members in a scheme. There are many fixed costs that lead to higher per-member costs for smaller schemes and it is difficult to envisage significant savings from merging just administration services, particularly if the schemes to be consolidated have different benefit structures.
Model 2: The assets of a number of schemes are managed as one pool, though in line with the individual schemes’ investment strategies, leaving all other services to be provided on a scheme-specific basis
The Taskforce envisages here a type of multi-scheme fiduciary management, enabling smaller schemes to access opportunities – such as infrastructure – that may not be available to them individually. It sees advantages too in a consistent advisory and modelling approach. However, pooling arrangements such as those being put in place by the Local Government schemes are unlikely to be practicable if individual schemes are to retain their own investment strategies.
Model 3: merges administration and investment, combining models 1 and 2, but also has just one set of trustees
However, each sponsoring employer has a separate, ring-fenced section. One advantage of this arrangement is the likelihood of improved governance, with a professional trustee board. However, if one employer is unhappy with one aspect of the service, it is necessary to tolerate it or to de-merge. Such schemes function at present only for associated employers and are not open to non-associated employers.
Model 4: “Superfunds” would consolidate both the assets and liabilities of participating pension schemes and discharging solvent employers from their pensions obligations.
The Taskforce’s second report introduces a new type of consolidated scheme, to stand between employer-run schemes and the PPF – the “Superfund”. The Taskforce considers that such a vehicle would provide an attractive option not just for schemes with a weak employer covenant but for those with a stronger employer covenant as well, perhaps those wishing to discharge their pensions obligations but unable to afford the cost of securing benefits with an insurer.
Under this model Employers would pay a “fee”, either in cash or in the form of secured debt, the fee being less than the amount they would need to pay to secure the benefits with an insurer. Benefits would be converted to a common structure, on the basis of actuarial equivalence. However, without an ultimate guarantor, members’ benefits could still not be guaranteed, although the Taskforce believes that they would be more secure than under their current arrangements, particularly for those with a weaker employer covenant.
It is worth noting that existing arrangements for stressed schemes, such as a Regulated Apportionment Arrangement, involve an “anti-embarrassment” stake in the employer for the pension scheme or the PPF, so that it can benefit from any turnaround in the employer’s fortunes. How would this be addressed in a Superfund? One can envisage a situation where members’ benefits have to be cut back within the Superfund but would have been paid in full had the scheme remained with its – now successful once more – employer. Furthermore, with lower proposed solvency requirements, it seems that a Superfund would constitute an unfair competitor to the insurance market.