Commenting on the PLSA taskforce looking at the creation of a Defined Benefit (DB) superfund, Calum Cooper, Head of Trustee Consulting, said:

“The PLSA taskforce’s thinking is out of step with the Department for Work and Pensions (DWP’s) Green Paper on the sustainability of DB pensions issued just two weeks ago. The DWP concluded that DB pensions are affordable for the majority of employers. However, the PPF’s modelling suggests that in the worst 10% of outcomes around 1,000 sponsors could be insolvent by 2030.

“For the DWP to say 'affordability is fine' seems to be answering a very narrow question. By the DWP’s own statistics DB scheme recovery plans are barely any shorter than they were 10 years ago, despite hundreds of billions of pounds being spent by companies.  And yet when sponsors fail members lose £50k on average.  

“However, there are good reasons to question whether consolidating DB schemes to improve efficiency and investment returns represents the most effective means of addressing the issues. There’s an elegance to the theory but it feels vulnerable to be being hijacked by reality.”

Discussing the realities of consolidation, he added:

“Moving into a merged superfund would mean schemes would cede control and influence over outcomes. The cost and risk exposure for larger schemes (either in absolute terms or relative to their sponsor) is too big for their Trustees or Sponsors to surrender control and influence over funding and investment outcomes willingly.

“For smaller schemes it’s clear to see why voluntary consolidation could be attractive. A combination of relatively high fixed running costs and the prospect of achieving lower fees for investment management whilst accessing a wider range of investment opportunities could rightly trump the desire and value of retaining control and influence. Indeed both the DB Green Paper and the FCA Asset Management Study review which closed last month recognised the potential benefits of consolidation for smaller schemes and are keen to investigate ways to enable this. Making it happen, however, will be a challenge. If will is lacking – i.e. if it is to realistically cover larger schemes, then it will be a monumental challenge.

“For closed schemes, finding a simpler and more cost effective route to moving members to a standardised benefit scale would generate real efficiencies for the industry, which alongside consolidation of assets, administration and governance could disproportionately benefit the thousands of small schemes.”

Running through the practicalities of consolidation, he said:

“Creating a £1.5 trillion superfund would require a huge amount of up front spend and resource, covering bulk transfers, project management, member communications, administration and transition costs, to name a few. These upfront costs would need to be balanced against the potential cost savings.

“If we look to the experience of the Local Government Pension Scheme (LGPS), here the Government opted for asset pooling over merger. All the evidence showed that pooling assets would deliver the same cost benefits, but faster, than fund merger.

“There is no denying that the benefit promise could be more affordable if we lowered the cost of investments, as this would drive efficiencies which would add up over time.  A 0.5% pa saving in fees can reduce the total cost of funding benefits by 10%, which amounts to a couple of hundred billion across UK DB as a whole. However, consolidation of any kind will be a challenge in terms of cost, resource and will, and cost savings won’t be immediate due to the time it will take to run off existing investment arrangements and transition to new more cost effective approaches. In fact, as we’ve seen in the Local Government Pension Scheme (LGPS) pooling initiative, short term establishment and transition costs could exceed savings.

Discussing the possibility of cutting back benefits for access to a superfund, he added:

“Reports suggest the taskforce will look at whether trustees should be able to sanction cuts to pension benefits in return for access to a superfund. If this were to happen it could be subject to legal challenge, as well as going against the Minister for Pensions, Richard Harrington’s, comments about pensions being deferred pay, and a promise that must be kept.