BOLD THINKING ON CONSOLIDATION NEEDED, SAYS PLSA DB TASKFORCE

The Pensions and Lifetime Savings Association today released the second report by its Defined Benefit (DB) Taskforce, ‘The Case for Consolidation’.  The report outlines how consolidation into new superfunds could tackle the issues which place an unacceptable, and mostly unrecognised, risk on scheme members.

In its first report the DB Taskforce identified that members of schemes with the weakest employers – schemes which hold 42% of liabilities of schemes in deficit – have just a 50:50 chance of seeing those benefits paid in full.  These schemes are stuck with a choice between trying to manage this risk through heavy reliance on struggling sponsors or hoping to reach buy-out levels of funding which few can afford.  There is a clear and pressing need for an alternative option.

‘The Case for Consolidation’ examines four models that offer trustees an additional option that would alleviate the level of risk carried by scheme members.

1. Shared services: combining administrative functions across schemes achieving cost savings through economies of scale. Especially beneficial to small and medium schemes and brings an estimated aggregate saving for schemes of £0.6 billion per year.
2. Asset pooling: different schemes’ assets are pooled and managed centrally while individual schemes retain responsibility for their governance, administration, back office functions and most advisory services.  Especially beneficial to small and medium schemes and brings an estimated aggregate saving for schemes of £0.25 billion per year.
3. Single governance: different schemes’ assets are consolidated into a single asset pool; governance, administration and back office functions are also combined. Estimated aggregate saving for schemes of £1.2 billion per year; comprised of savings from shared services (£0.6 billion), asset pooling (£0.25 billion) and single governance cost-benefits (£0.36 billion).Options one to three present valuable savings but do not materially reduce the risk faced by members of DB schemes.  The DB Taskforce’s report outlines a further potential option – the superfund.
4. Superfund, full merger: designed to absorb and replace existing schemes.  Employers and trustees are discharged from their obligations for future benefit payments which would be paid from the superfund. According to modelling for the DB Taskforce, a consolidator like this could improve security for savers in CG4¹ schemes – reducing the probability of seeing their scheme fail from 65% to close to 10% or even less.

Ashok Gupta, Chair of the Defined Benefit Taskforce, commented:

“There’s a general assumption that 100% of DB scheme members are guaranteed 100% of their benefits. That is the intention but it will not be the reality. The reality is that savers in weaker schemes have a 50:50 chance of seeing their benefits paid in full. The Taskforce wants to find ways to improve those odds and building on its first report looked at four models of consolidation.

“We think the biggest gains lie in the merger of schemes, into what we have called superfunds. We believe superfunds have the potential to offer great benefits to members, employers, the regulator, the industry and the economy.

“Members get a better chance of more pension benefits being paid. Employers get a lower cost alternative to a buy-out. The regulator gets a sector with better managed risks. The economy benefits from improved investment by superfunds and employers are freed from onerous DB burdens.”

Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association, said:

“The Taskforce was asked to think about solutions and it has – including the new and bold idea of superfunds. There’s work to be done on developing the superfund idea and the Taskforce will be analysing it in detail over the coming months so we can contribute fully to the Government’s Green Paper consultation.”

A copy of the PLSA DB Report ‘The Case for Consolidation’ is attached.  The Taskforce Interim Report can be found on our website here.

We have provided a set of Q&A to answer any initial queries you may have – please see Notes to Editors.

Ashok Gupta will present ‘The Case for Consolidation’ on 9 March at the PLSA Investment Conference in Edinburgh.  The session will be web-streamed live and available to view by registering here.

The Pensions and Lifetime Savings Association today released the second report by its Defined Benefit (DB) Taskforce, ‘The Case for Consolidation’.  The report outlines how consolidation into new superfunds could tackle the issues which place an unacceptable, and mostly unrecognised, risk on scheme members.

In its first report the DB Taskforce identified that members of schemes with the weakest employers – schemes which hold 42% of liabilities of schemes in deficit – have just a 50:50 chance of seeing those benefits paid in full.  These schemes are stuck with a choice between trying to manage this risk through heavy reliance on struggling sponsors or hoping to reach buy-out levels of funding which few can afford.  There is a clear and pressing need for an alternative option.

‘The Case for Consolidation’ examines four models that offer trustees an additional option that would alleviate the level of risk carried by scheme members.

1. Shared services: combining administrative functions across schemes achieving cost savings through economies of scale. Especially beneficial to small and medium schemes and brings an estimated aggregate saving for schemes of £0.6 billion per year.
2. Asset pooling: different schemes’ assets are pooled and managed centrally while individual schemes retain responsibility for their governance, administration, back office functions and most advisory services.  Especially beneficial to small and medium schemes and brings an estimated aggregate saving for schemes of £0.25 billion per year.
3. Single governance: different schemes’ assets are consolidated into a single asset pool; governance, administration and back office functions are also combined. Estimated aggregate saving for schemes of £1.2 billion per year; comprised of savings from shared services (£0.6 billion), asset pooling (£0.25 billion) and single governance cost-benefits (£0.36 billion).Options one to three present valuable savings but do not materially reduce the risk faced by members of DB schemes.  The DB Taskforce’s report outlines a further potential option – the superfund.
4. Superfund, full merger: designed to absorb and replace existing schemes.  Employers and trustees are discharged from their obligations for future benefit payments which would be paid from the superfund. According to modelling for the DB Taskforce, a consolidator like this could improve security for savers in CG4¹ schemes – reducing the probability of seeing their scheme fail from 65% to close to 10% or even less.

Ashok Gupta, Chair of the Defined Benefit Taskforce, commented:

“There’s a general assumption that 100% of DB scheme members are guaranteed 100% of their benefits. That is the intention but it will not be the reality. The reality is that savers in weaker schemes have a 50:50 chance of seeing their benefits paid in full. The Taskforce wants to find ways to improve those odds and building on its first report looked at four models of consolidation.

“We think the biggest gains lie in the merger of schemes, into what we have called superfunds. We believe superfunds have the potential to offer great benefits to members, employers, the regulator, the industry and the economy.

“Members get a better chance of more pension benefits being paid. Employers get a lower cost alternative to a buy-out. The regulator gets a sector with better managed risks. The economy benefits from improved investment by superfunds and employers are freed from onerous DB burdens.”

Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association, said:

“The Taskforce was asked to think about solutions and it has – including the new and bold idea of superfunds. There’s work to be done on developing the superfund idea and the Taskforce will be analysing it in detail over the coming months so we can contribute fully to the Government’s Green Paper consultation.”

A copy of the PLSA DB Report ‘The Case for Consolidation’ is attached.  The Taskforce Interim Report can be found on our website here.

We have provided a set of Q&A to answer any initial queries you may have – please see Notes to Editors.

Ashok Gupta will present ‘The Case for Consolidation’ on 9 March at the PLSA Investment Conference in Edinburgh.  The session will be web-streamed live and available to view by registering here.