Rory Murphy: The co-operative principle, as its longevity has demonstrated, is timeless in its simplicity, and could be a game changer for smaller pension funds and their members.
In a 2022 report on defined benefit (DB) and hybrid schemes, The Pensions Regulator found that 80% of DB schemes had fewer than 1,000 members, but also noted these smaller schemes accounted for only 10% of total assets and total members in the DB universe.
These 4,000 or so smaller schemes face very specific challenges. As LCP analysis found earlier this year, smaller schemes are more likely than their larger counterparts to highlight data, benefit and legal issues as their principle headaches – possibly because many of them lack the in-house expertise or resources to address these challenges themselves and are therefore reliant on services bought in from specialist external providers.
Happily, many of them have strong governance models and are well placed to address these challenges. But even these schemes could be getting disproportionately hammered on costs because data, administration, actuarial, legal and other bought-in advisory services still have to be paid for - in many cases with a minimum fee level.
I have written before in Professional Pensions about the importance of trustees being ready to challenge and question advisors and service providers, and have always applied that approach in all my trustee roles. But however vigilant a smaller scheme's trustees, and however diligent and efficient their service providers, I can't escape the concern that we could be driving a better deal for our members when it comes to cost.
For larger schemes, with many more members and much greater financial resources, the issue of advisor fees, though still important, is lower down the list of priorities, according to LCP. Not only are costs-per-member lower, but some of the biggest funds have the resources to fund in-house specialists (not just investment managers but also lawyers, for example). And of course, they have the financial clout both to drive down costs, and to access a wider range of services.
I wonder if those of us who are trustees of smaller schemes might learn from the example of the co-operative movement, founded in the 19th century as a way for the working class poor to pool resources and thereby access more affordable goods and services.
Of course, small scheme consolidation is happening and will no doubt continue for some time to come. But for those smaller schemes who, for whatever reason, can't or don't want to go down that route, wouldn't it make sense to explore whether those co-operative principles could be applied to paying for advisory services?
If every smaller scheme, perhaps across a particular sector, were to pool their resources to use the same actuary or lawyer, the resulting benefits to schemes and their members could be significant. Greater strength in numbers could not only drive down costs, but also open up doors to options or services that are currently only open to the bigger players.
I'm not suggesting that pensions advisory firms are in any way ripping off smaller schemes. I'm sure most of them do a great job for the limited returns they can expect from such business. In fact, co-operation between small schemes would potentially offer a business opportunity to service providers, enabling them to benefit from broader demand for services that aren't commercially viable for smaller schemes currently.
As Henry Ford said, "Coming together is a beginning. Keeping together is progress. Working together is success". The genius of the founders of the co-operative movement lay in the simplicity of their concept - the pooling of scant resources to drive a better deal for the poor. To equate small pension funds in the 21st century to the working class poor of the industrial revolution is, I realise, stretching things a bit. But the co-operative principle, as its longevity has demonstrated, is timeless in its simplicity, and could be a game changer for smaller pension funds and their members.
Rory Murphy is the past chair of two maritime industry pension schemes, the MNOPF and the Ensign Retirement Plan
