How the London Stock Exchange Group merged its pension schemes

Jonathan Stapleton looks at why and how the London Stock Exchange Group conducted a sectionalised merger of its two main pension schemes.

Jonathan Stapleton
clock • 13 min read

Key points

  • LSEG had two schemes, each with different investment strategies, trustees, advisers and providers 
  • This arrangement was inefficient and the running costs were high
  • The firm decided to conduct a sectionalised merger to maximise cost and investment efficiencies

Jonathan Stapleton looks at why and how the London Stock Exchange Group conducted a sectionalised merger of its two main pension schemes.

The London Stock Exchange Group (LSEG) is a national institution, tracing its heritage back to 1801, when it was originally founded.

But the group has evolved significantly, particularly over the past 10 years, conducting a series of acquisitions (see box), including the purchase of a 57.8% stake in LCH.Clearnet, the European-based clearing house, in 2012.

While this change has allowed the group to expand its range of products and services, as well as to diversify into new geographical areas, it has also led to some challenges from the pension and benefits perspective.

LSEG group head of human resources Tim Jones explains:"What we've always set out to do is to try to ensure that we have market-leading, market-aligned benefits in all of the geographies in which we operate.

"So one of the big challenges we have is how we harmonise terms and conditions."

He adds: "One of our key aims has been to try to prevent having individuals sitting next to each other, all of whom are on myriad different terms and conditions, some higher, some lower."

On reviewing the groups pension and benefits offerings across LSEG, one of the key things Jones and his team noticed was that the cost of running the group's two defined benefit schemes- the London Stock Exchange Retirement Plan, which had closed to new entrants in 1999 and future accruals in 2012, and the LCH Pension Scheme, which was closed to future accruals in 2013; schemes which together have a membership of 3,000 and assets of around £600m - was out of line with the market.

Jones says: "One of our challenges then, as you can appreciate, was juggling and managing two pension schemes, two sets of trustees, two sets of advisers, and a whole host of asset managers and other providers."

About the London Stock Exchange Group

The London Stock Exchange Group (LSEG) is one of the world's largest market infrastructure and exchange firms, owning businesses such as Borsa Italiana, MTS and FTSE International in addition to majority stakes in firms such as LCH.Clearnet and MTS.

LSEG has experienced significant growth over recent years, expanding globally and broadening its business in risk management, settlement and information services.

It has also conducted a number of acquisitions over the past few years - taking complete ownership of FTSE after buying a 50% stake in the business from Pearson in 2011 and purchasing a 57.8% stake in LCH.Clearnet, the European-based clearing house, in 2012. In 2014 it acquired Russell Investments, keeping its index arm and divesting its consulting and asset management operations.

 

Merger considerations

LSEG started to look at how to make running the two schemes more efficient and to have a single, very clear, investment strategy.

In order to bring about these changes, the LSEG team discussed a number of options - including a full merger of the two schemes; the alignment of scheme advisers, where the schemes would continue to be run separately but with a common set of advisers; and a sectionalised merger, where assets and liabilities would be merged into a single scheme separated into different sections but with a common trustee board and set of advisers (see box).

After careful discussion with stakeholders - which included both sets of trustees; the boards of the sponsoring entities of the two schemes, LSE Plc and LCH Ltd; as well as various risk committees - LSEG and the respective trustee boards decided against the alignment of scheme advisers as they felt it would not take advantage of all the cost and investment efficiencies available.

They also ruled out a full merger on the grounds of complexity - both because of regulation, as the London Stock Exchange and LCH.Clearnet are both independently regulated, and also ownership, as LSEG does not own 100% of LCH and there were other shareholders to consider.

As such, the decision was taken to proceed with a sectionalised merger, an option Jones said also had the advantage of allowing other sections to be added to the arrangement at a later date should LSEG make further acquisitions.

Jones explains: "It became clear that there was support, buy-in, and a real level of engagement about the opportunity and the benefits of a sectionalised merger. And that really then set us on track to delivering the merger, which from conception to delivery, took around two years."

Chris Broad, chairman of the new scheme, the London Stock Exchange Group Pension Scheme, says the sectionalised merger would have also been the choice of the trustees had the decision been theirs alone.

He says "It enables us to maximise the opportunities on offer and bring the assets together without having to unify the rule book and benefits. And not having to go through that step gave us a much smoother path and made it easier for the two trustee boards to wholly support the process and avoid having to negotiate a single set of rules, which clearly would have been problematic."

The consolidation options LSEG considered

LSEG considered a number of scenarios for the consolidation of their pension schemes to maximise integration, cost saving and de-risking opportunities. The three main options it considered were:

1. Alignment of scheme advisers
Under this option the schemes would continue to be run separately, but with a common set of advisers. LSEG felt that, while this option would have been easy to implement and would have reduced costs, it would not have allowed for full synergies to be achieved or take advantage of all investment opportunities.

2. Sectionalised merger
This scenario - the one eventually chosen by LSEG - would merge assets and liabilities into a single new scheme, separated into different sections, but with a common trustee board and set of advisers. LSEG felt that, while this option was perhaps more challenging from an implementation perspective than option one, it offered greater cost and investment efficiencies and also allowed for further sections to be added to the scheme in the future.

3. Full merger
Under this option, the assets and liabilities would merge into a single new scheme with no sectionalisation. While LSEG felt this approached maximised the investment opportunity, it said it gave insufficient flexibility to manage future funding and to manage any potential governance changes. This was also the most difficult option to implement and would have significant legal considerations.

 

Implementing the new scheme

Having made the decision to conduct a sectionalised merger, LSEG set up a joint working party, including representatives of both the company and the two existing trustee boards, to aid communication between all the parties involved.

Broad says the process itself split into two phases: first the scoping and feasibility, asking the big questions about how the two schemes could be brought together; what a new scheme should look like and how it should be governed; followed by implementation.

But, despite having a working party, there was no full-time project team responsible for implementing the new scheme - and, before Ava Lau joined as pensions manager in June last year, LSEG relied on their legal and actuarial advisers, a contractor and assistance from various other teams around the company to drive the process forward.

But, as LSEG group head of reward Graham Shepherd explains, there was also a huge amount of project management going on throughout the process. He says: "You could have had a project manager just for the legal stream.

"We did, prior to Ava joining us in June 2016, have a contractor here for two years, which really helped co-ordinate this from the company side, but we were also heavily reliant on both the company and trustees' actuarial and legal advisers."

Shepherd says the joint working parties were crucial to the process - providing a forum to air the issues and discuss the shape of the new trust.

Last summer, the selection process for the legal and actuarial advisers to the new scheme was conducted - a process that resulted in the appointment of Eversheds and Mercer, firms that had previously advised the LSE plan and the LCH scheme respectively - preparing the scheme for an autumn launch.

A new trustee board

As LSEG was setting up a new scheme as part of the sectionalised merger, it also had to set up a new trustee board, which has nine members.

Broad says a lot of thought was put into the governance of the new trustee board as it was setting up the scheme and it was decided to restructure the governance, adding an independent trustee to the board.

In terms of committees, the new scheme decided on having an operations committee and an investment committee, meeting on a quarterly cycle in the month before the main board meeting, but decided against introducing an audit committee. It said it would also introduce working groups and sub-committees for specific projects if they were needed.

Lessons learned

While the implementation process went well - and the new scheme began operation as planned on 5 September last year - there are a number of key lessons LSEG feels others could learn from the process.

Key among these learning points was the importance of project management.

Shepherd explains: "I think from the company perspective, we might have under-resourced on project management, on actual dedicated pension people, from the outset."

Broad agrees saying the second part of the implementation - which involved doing the really detailed project and "knocking down" a very long list of important things, some with statutory or regulator implications - was a "huge amount of work" and could have been better resourced.

Shepherd adds: "We're a relatively small scheme but the effort involved is probably 80% that of a large scheme, because you've still got to do all the same things."

LSEG group pensions manager Ava Lau also agrees that having project management resource would have been valuable.

She says: "As scheme managers, trustees, lawyers and consultants, we are very good at doing our day job but we can't take it for granted we can manage a sectionalised merger at the same time."

Lau explains it could, for instance, be hard for a lawyer to understand that, if they negotiate on one point, it could set a project back for two months and have a significant impact on the overall project plan. She says: "I think you need someone really taking a step back - to have some understanding of pensions but also be able to move the project forward and pull the different strings with different parties at the same time."

Jones urges any business considering a similar project to continually test the strategic rationale for the project - checking it is still robust and sound - to plan a level of flexibility for contingencies and to communicate well.

He says: "You can never over-communicate."

Orientation days

One way in which LSEG decided to communicate the scheme to those involved in the ongoing day-to-day operation of the scheme was to run two half-day orientation meetings.

As Broad explains: "We asked the obvious: do we all know everything that we need to know in order to take responsibility for the new scheme on 5 September?"

He says this was particularly important as some people knew one of the two predecessor schemes well but were not familiar with the other and notes there were also a number of people - auditors, people from finance, HR, reward and so on - who have a more limited role in scheme operation but who needed to understand the scheme.

In total, around 35 people attended these sessions - which Broad believes were "really, really critical to getting everyone on side".

Lau says the success of the orientation days was reflected in responses to the post-implementation review - where, when asked to give a score out of five for the meetings, 92% of people gave a score of four and above.

The scheme was also very clear in its communication to members. As Jones explains: "We were very clear in that communication to members but we didn't go overboard. What we were seeking to do is make the scheme better run, more efficient, more cost effective and more resilient to risk to preserve the benefits of members in the way that we intended to do. But it hasn't actually altered anything for those individuals."

Celebrating completion

At the end of last year, LSEG held a small reception to thank the trustees, advisers, providers and others who were involved in the merger. Around 50 people turned up to the celebration - a reflection of just how many people were involved in making the project a success.

Lau says: "It reflects the level of effort put in by the advisers; the company; individual corporate functions; and by both the old and new trustees as well as many others."

Jones adds: "For a project of this magnitude - with all the employer and member implications it entailed, all the assets it involved - we only had, in effect, one permanent employee running it.

"But there were so many others involved, including a whole host of LSEG employees - from our risk, legal, communications, finance and treasury teams - who were doing it as an additional part of their job."

The future

Going forward, the scheme will be focussing on finalising the integration but also looking at the strategy going forward - including asking whether it should undergo further liability reduction and risk transfer exercises (the LSE scheme already conducted a buy-in with PIC in 2011).

Shepherd says the current focus is on stabilisation and getting all the providers comfortable - noting the scheme is also undergoing its first joint valuation at the end of the year. But he adds that the increasing focus after that will be on strategy.

Broad agrees: "We will be able to look at this strategy through the common lens of a single group pension scheme, look at the journey plans, and ask how we can drive the really hard decisions about investment strategy and funding."

 

CVs

Chris Broad
Chris Broad is chairman of the new London Stock Exchange Group Pension Scheme trustee board, having been chairman of the legacy LSE plan since 2007. Broad is also global head of business operations at Thomson Reuters and responsible for a range of specialist regulatory and commercial projects. Prior to Thomson Reuters, he was chief operating officer at FTSE, having previously spent 20 years at the LSE in a range of roles spanning corporate development, trading, settlement, clearing and major programme management.

Tim Jones
Tim Jones joined the London Stock Exchange Group in 2010 and was appointed group head of human resources in 2011. He is responsible for all aspects of human resources across the group. Prior to this, Jones held a range of HR roles at media group Aegis, latterly as human resources director for Western Europe, Middle East and Africa. He started his career in commercial and financial roles at Marks & Spencer. In terms of pensions, he has been involved in the management and closure of two defined benefit schemes, numerous GPP schemes and responsible for benefit harmonisation programmes globally.

Ava Lau
Ava Lau joined LSEG as its group pensions manager in June 2016 from Willis Towers Watson, where she qualified as an actuary. Prior to joining LSEG, she was seconded to the Tesco pensions department for 15 months, where she was heavily involved in the pension consultation to close their £9bn DB scheme and the set-up of its award-winning DC retirement savings plan.

Graham Shepherd
Graham is group head of reward for LSEG, having joined the group in December 2011. He has over 30 years of HR experience, in UK and internationally - having worked for Willis Towers Watson, AT&T, BT and BP. Although not currently one, he has been a trustee of several pension schemes with previous employers.

 

Key points

  • LSEG had two schemes, each with different investment strategies, trustees, advisers and providers 
  • This arrangement was inefficient and the running costs were high
  • The firm decided to conduct a sectionalised merger to maximise cost and investment efficiencies

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