Consolidation of defined benefit (DB) pension schemes could cut costs by £500M a year
Combining consolidation with benefit simplification will reduce costs even further
Savings could exceed £10 billion over DB schemes’ lifetime
With deficits now equivalent to £83,000 for every member of remaining DB schemes, ‘doing nothing’ is not an option
Scheme consolidation is one of the recommendations JLT is making following publication of its latest white paper titled, ‘ How do we get out of this Pensions Black Hole?’, which attempts to find a lasting settlement on ballooning DB pension deficits.
The £500 million savings would result from a reduction in administration and investment costs , as well as lower actuarial, covenant and legal costs, by consolidating the 5,500 smaller DB pensions schemes with less than 5,000 members to 500* larger schemes as proposed by the PLSA. This would equate to total savings of £10 billion over 40 years, which is the estimated time by which all DB pension schemes will have closed entirely.
Further savings could be achieved by simplifying benefit structures, with many DB scheme currently having different benefit categories and, within each category, different tranches of benefits. While the exact savings would be scheme-specific, they could have a material impact, including:
• simpler administration, with reduced chances of error;
• far greater opportunity to adopt a 'self-service' approach to member requests thanks to greater automation; and
• savings on buy-out and buy-ins, because simpler schemes are more attractive to insurers.
In the last ten years, the gap between the assets and the liabilities of DB pension schemes has almost doubled. The total deficit is now £900 billion which is the equivalent of £83,000 for every member of the remaining 5,800 or so DB schemes. In 2016 alone, the deficit per member has jumped by 14%.
To address this pensions ‘black hole’, JLT’s recommendations, detailed in its report, in addition to consolidation of DB schemes, include:
1. Simplify complex benefit structures, by introducing regulations similar to those for conversions of Guaranteed Minimum Pensions (GMPs)
2. Remove all barriers to liability management exercises
3. Allow the use of CPI for increases to pensions, past, present and future
4. Change bulk transfer regulations, to allow transfers to new schemes without member consent in circumstances where transfers are in members’ interests
John Wilson, Head of Technical, JLT Employee Benefits, comments: “With the prospect of millennials being the first generation to have worse pensions than their parents, the chance to try and escape this pensions ‘black hole’ and to address the intergenerational unfairness of legacy DB pension schemes is an opportunity not to be missed. Therefore, all stakeholders, including employers, trustees, members, policy makers and the pensions industry, should act together and explore the options for achieving a lasting DB settlement.
“All stakeholders stand to benefit. Members of legacy DB pension schemes would see greater sustainability of past pension promises, which may be lower than original expectations, but are more likely to exceed PPF benefit levels.
Trustees of these schemes would become less dependent on sponsoring employers. More generous contributions could become available for employees in respect of current workplace pension arrangements. Companies would have more resources available for research, investment, and business activity. Overall, the economy would receive a boost.”
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Footnote:
* Research assumptions: The estimated total running cost for all private sector DB pension schemes with less than 5,000 members is £1bn p.a.. The calculations assume the cost savings if all schemes with less than 5,000 members merged to form schemes with 5000+ members, therefore incurring similar costs to those incurred by such larger schemes. As schemes would be segregated, the valuation costs of the merged schemes and the levies they pay would not change.
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