Bold thinking on consolidation needed, says PLSA DB taskforce

07 March 2017

The Pensions and Lifetime Savings Association released the second report by its 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 Defined Benefit (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:

• 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.
• 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.
• 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).
• 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.

Press release

Full report

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