While the majority of final salary DB schemes are now closed and now amount to a legacy issue/headache for sponsors, The Purple Book 2018 reports there are still around 5,450 such schemes still active.
However, many of these are very small with 35% having few than 100 members and 44% having few than 1000 members. In fact, only 4% of schemes have more than 10,000 members which is why consolidation has been high up policy makers’ agenda for some time (albeit not high enough to make it into the Queen’s Speech!).
Consolidation can take a number of forms, from DB Mastertrusts, through Sole Trusteeship, to the formal “Consolidators”, also known as Superfunds. What does this mean from a trustee perspective? The main point is that the variety of possible options available to trustees is, frankly, overwhelming, especially for lay trustees, and getting the right advice to support a decision to proceed with a consolidator will be a difficult and expensive business (as it’s new for the advisers, too – especially in advance of formal legislation on consolidators) – many will decide it is just too difficult until the path is much better trodden.
Trustees will also need to be especially aware of conflict when considering potential consolidation options which can come from many directions – as members (who might have very different views on which route is best), as part of management of the sponsor, the advisers – and professional trustees too – we are considering very carefully our own conflict policy given our founder Antony Miller sits on the trustee board of the Superfund.
Further detail on the formal requirements, and whether these will be set out in legislation or not, now looks to have been postponed. I think most in the industry hope that it will be taken forward as more options for members’ benefits feels better than fewer. However, there are a number of significant political and practical issues to resolve. For example schemes considering consolidators are likely to require comparative insurer pricing – but insurers are unlikely to quote for less than 100% of benefits where this is legally not a real options, even if they were willing to spare their scarce resources for what might not be a genuine request for a quote – this could be a significant barrier.
Members’ best interests have to remain the number one priority for trustees. It is the trustees’ responsibility to ensure that members’ benefits are looked after, whichever route is followed.
Having participated in the Greatest Good report project four years ago, the potential rise of consolidators has caused 20-20 Trustees to think again about the situation of the significant proportion of smaller schemes which are never likely to afford their benefits, whether they are best served by the current regime (or indeed by proposed consolidators which are likely to focus on larger schemes for economic reasons), and the potential impact of drift on different groups of those members. There are no easy answers here but it is right for all of us involved in pensions to keep asking the questions.