In an increasingly health obsessed society, we often read stories of the many who seek their healthy ideal the easy way: having bariatric surgery rather than using diet and exercise to lose weight; taking statins to combat cholesterol or drugs to treat diabetes rather than following specially controlled diets. In pensions, a similar trend appears to be emerging.
2016 seems to be the year when it has become fashionable to call for a ‘reality check’ about the state of defined benefit pension schemes. The PLSA has set up a taskforce, the Pension Institute and Cass Business School has called for government intervention and the Work and Pensions Select Committee has now launched an inquiry into DB pension schemes.
The clarion call appears to be for radical surgery: let us put a gastric band around the bloated benefits that are due to members before the whole thing collapses.
But should we not ensure we have done all we can in terms of diet and exercise before we consider such radical surgery? Do we not owe it to the members who are relying on the pensions due from defined benefit schemes to ensure we are cutting out all unnecessary costs and inefficiencies before we decide they are all doomed?
There has been considerable talk over the past couple of years about the inefficiencies of the Local Government Pension Scheme – 89 separate funds in England and Wales, all of which are providing the same benefits but are managed completely separately. This means 89 different sets of advisers: actuaries, lawyers, investment consultants, etc, all being paid for doing essentially the same thing. It seems obvious to most that there are efficiencies to be gained from the 89 different funds co-operating in some way.
Why are we not considering a similar diet for private sector DB schemes? There are over 6,000 DB schemes still in operation: that’s 6,000 schemes all paying separately for a whole host of advisers – imagine the efficiencies that could be gained from co-operation between just some of the schemes.
At The Pensions Trust we are responsible for 37 different defined benefit pension schemes. But they all share one actuary, one legal adviser, one accountant, etc all under a mastertrust arrangement. The economies gained from this model are significant, and we believe it should be used much more broadly across the DB pensions landscape. It is a very simple model to operate: it does not require benefits to be consolidated, and the schemes still retain their connection with the principal employer and as separate sections the assets and liabilities of each scheme are ring-fenced.
We don’t fool ourselves that we should be the only provider in this space: although we have been doing this for over 70 years, there are now other consolidators of DB schemes emerging and we welcome that. Just as it took the emergence of more than one mastertrust to really turn the tide of DC towards a consolidated model, the emergence of a selection of credible DB consolidators will help this model to gain credence and defeat the tide of vested interests that it swims against.
The other glaring area for attention before we opt for drastic surgery is investment fees. If operational efficiency is the diet that is needed, reduction in investment management fees is the exercise.
The Transparency Task Force has recently found that over 100 hidden costs and charges are routinely applied to pensions and investments and that hidden fees can reduce pension gains by up to a third. We should not kid ourselves that this is only happening in DC schemes. Investment fees remain high in DB, particularly in so called ‘alternative’ asset classes. There are numerous fund managers who have amassed considerable fortunes from managing pension fund assets, with much of it bearing no relation to performance delivered.
I am not denying that our patient has become increasingly unhealthy over the years – increasing longevity and the prolonged low interest rate environment is perhaps the pensions equivalent of using our cars too much and spending too many hours on the sofa watching soap operas. And it may be that, in some schemes, radical surgery will end up being the only option.
But as an industry we do our members a huge disservice if we jump to the solution of surgery through overall amendments to benefits before we have ensured that the patient is following the appropriate diet and exercise regime.
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