The benefits promised by scheme consolidation are available today. Patrick Bloomfield asks why more trustees and sponsors aren't taking advantage of them
The ACA's 2017 Pensions Trends survey showed that sponsors are pretty cool on consolidation. Only 16% would consider consolidation and only 32% thought the potential cost savings were real. Sponsors need better information on what existing consolidation solutions could deliver for them.
Champions of consolidation talk about better governance, access to advice, lower unit running costs and access to better investments. Existing solutions offer all of these benefits, through a variety of forms: DB master-trusts, standardised service models and sole trusteeship. New solutions are also being developed, many of which target ultimate consolidation through buy-out. No new legislation is needed for any of these solutions to be viable.
Consolidation isn't just a small scheme issue, but the costs and under-regulation of smaller schemes have pushed consolidation up industry's agenda. The sense that TPR wasn't watching has led to cost saving being prioritised over proper stewardship for some schemes. TPR is about to address this, which will turn up the heat for trustees and sponsors of smaller schemes. Again, no new legislation is needed, this is regulation within the current framework.
Interestingly the 2017 Purple Book shows that smaller schemes are no worse funded. Schemes of all sizes are around two-thirds funded on buy-out (in fact, schemes with under 100 members are doing better than the rest, at 72% funded on buy-out). This is despite TPRs' 2014 research showing running costs are six times higher per member for schemes with under 100 members compared to schemes with over 5,000 members (£1,054 pa versus £182 pa).
Since members don't seem to be suffering, this issue rests with the sponsors who underwrite the risk and pay the bills. This makes sense, since a scheme is simply a sponsor's vehicle for delivering the pensions part of their remuneration package to past employees.
Faced with stiffer regulation these sponsors will have two choices: run your scheme properly or use one of the existing consolidation solutions to do it for you. Cost are likely to be the deciding factor and an exodus to existing solutions is brewing. The few who decide to go it alone will do so because they want to keep control and are willing to pay for it.
As things stand today, smaller schemes can have superb online analytics and tailored advice. It's a question of price and demand. My firm already provides these services to stand-alone smaller schemes and to existing consolidation solutions. The only change that's needed is with the trustees and sponsors buying services. The TPR's 21st century trustee campaign is pushing in this direction, but it needs the decision makers to get engaged.
Benefit simplification and sponsor release and are muddling the consolidation debate. Sponsor release is a separate debate altogether, which schemes of all sizes should engage with. The potential to improve member security and sponsor efficiency shouldn't be tied to a discussion on operational service models.
Considering if benefits can be simplified to a standard structure is stalling progress on accessing efficiencies through existing consolidation solutions. All benefit simplification will do is bring forward a lifetime of modestly lower running costs into a one off conversion project. Like everything else in the consolidation debate, benefit simplification can be done today under existing legislation. Any new, simplified process has connotations of a weaker duty to safeguard members' benefits, which should worry us all.
It's no surprise that the DWP's DB Sustainability White Paper has been delayed until Parliamentary Spring by Brexit. Frank Field's challenging questions aside, the lack of a political champion for pensions guarantees a damp squib. That's what we get for five Secretaries of State for Work and Pensions in two years.
Stimulating consolidation through new legislation isn't the answer. Freedom & Choice is an interesting parallel. It would have been far better to stimulate take-up of the existing capped drawdown legislation than have George Osborne spring Freedom & Choice on the public. Let's not make the same mistakes with consolidation.
Patrick Bloomfield is a partner at Hymans Robertson
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