Trustees say smaller schemes struggle getting economies of scale
Trustees feel smaller defined benefit (DB) pension schemes are disadvantaged when it comes to economies of scale, accessing investment opportunities and coping with regulation, according to Stoneport.
The consolidator's research report - Paths to the end goal - the case for consolidation in smaller DB and hybrid schemes - looked at the endgame challenges facing DB schemes.
It polled over 100 trustees from large and small DB pension schemes (86% DB and 23% hybrid) about their ideal endgame scenario, their decision-making challenges and potential solutions.
A majority of trustees said smaller schemes feel disadvantaged to their larger counterparts - lacking economy of scale, having restricted investment opportunities and facing compliance challenges.
Trustees said smaller schemes were also disadvantaged when it came to member outcome risk and member communications.
Most trustees (91%) said economies of scale is their number one challenge running smaller schemes. With many fixed costs spread across a smaller number of people, smaller schemes tend to incur higher overall costs per member.
Secondly, most perceived smaller schemes as being at something of a disadvantage compared to larger schemes in terms of accessing investment options.
While most trustees said they had the flexibility they needed in terms of access to investment options and asset classes, some remarked that disadvantages mainly related to investment costs and the lack of buying power.
Thirdly, scale was also cited a major factor when it comes to the significant regulatory requirements on DB schemes - with 69% of trustees felt smaller schemes were 'significantly' or 'somewhat' disadvantaged in this area due to the fixed-cost nature of compliance burdens and the fact the growing workload cannot be easily spread across individuals.
Some 31% of respondents scored the challenge of managing their scheme's compliance workload at 7/10, or higher, which Stoneport felt indicated significant levels of stress.
Commenting on the overall compliance burden, one professional trustee noted: "It's crippling, it's a nightmare for FTSE 100 companies; it can literally be a killer for a small business".
Achieving value for money through third-party services is also difficult for smaller schemes. Many trustees mentioned the greater buying power enjoyed by larger schemes, though others thought the services market was relatively competitive if smaller schemes targeted the right providers.
Turning to the less clear areas of disadvantage, these include member outcome risk and the ability to deliver quality member communications.
Some trustees commented that outcome risk - the risk of an employer not being able to fulfil its obligations to the scheme - was not related to the size of the scheme, as it is driven by the strength of the employer covenant and its profitability or cashflow. That said, the size of the scheme relative to the size of the employer was seen by some as a risk driver, as it could influence the attention the scheme received from its sponsor.
Finally, some trustees had concerns about their ability to deliver quality member communications. Some said smaller schemes lacked the scale to employ communications experts or set up relevant infrastructure such as a dedicated website. However, others felt smaller schemes were better able to tailor communications to member needs.
