Exploring Smaller DB/Hybrid Scheme Decision Landscapes
Paths to the End Goal
Presenting
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DB schemes are trying to find the right path towards their chosen end goal in an environment full of new options and uncertainties. This is a particular challenge for smaller schemes, namely those with under 1,000 members, which make up 80% of the pension scheme universe by number but may lack the time and resources to fully explore alternative routes. [1]
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Introduction
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To gain insight on how trustees see these challenges, Stoneport surveyed 102 pension scheme trustees in July/August 2021.
At the same time, the Pensions Regulator (TPR) is increasing the importance it places on assessing the value for money that schemes deliver – and this goes well beyond pure costs. Trustees are encouraged to “consider whether the benefits and services received… are of good quality and meeting the needs of membership” across scheme management, administration, investment, and communications. [2]
Trustee perceptions are important decision drivers when assessing value and ascertaining whether consolidation is a beneficial option. Boards need to make decisions on the relative advantages and disadvantages of continuing to operate as a smaller scheme, the timescales necessary to achieve an end goal, and the benefits and drawbacks of consolidation options such as master trusts and pooled structures. To gain insight on how trustees see these challenges, Stoneport surveyed 102 pension scheme trustees in July/August 2021. Of those, 86 oversaw DB schemes and 23 were responsible for hybrid schemes, while 17 were also attached to DC schemes. Those only responsible for DC schemes were not included.
Our research was designed to explore the decision-making landscape in relation to endgame planning, including identifying key decision-making problems and how they might be eased.
86
oversaw DB schemes while the rest oversaw hybrid schemes
Independent / professional trustee
Scheme size breakdown
For the purposes of this survey, we refer to three groups: • Very small schemes – fewer than 500 members • Small schemes – up to 999 members, and including the very small schemes • Large schemes – 1,000 members or more
Who did we survey?
44
100-999 members
2-99 members
1,000-4,999 members
Tap a chapter to explore
Where do trustees think smaller schemes are most disadvantaged?
01
Chapter One
Do trustees think smaller schemes offer value for money?
02
Chapter Two
End goals and milestones
03
Chapter Three
Barriers to consolidation
04
Chapter Four
Choose a chapter
Proportion of schemes by scheme membership size
Source: Pension Protection Fund, as of 31/12/20
Making the case for consolidation
05
Conclusion
Executive summary
80
The proportion of the pension scheme universe by number made up of smaller schemes
Trustees believe that smaller DB schemes are at a size-related disadvantage in selected areas, with diseconomies of scale and achieving value for money from service providers ranked as their top two concerns.
22
of small schemes are likely to consider a master trust arrangement or pooled structure arrangement
The growing compliance and regulatory workload is also a major source of stress for trustee boards as the quantity and variation of requirements placed on them increases.
Despite this, most trustees seem to remain confident that the way they operate offers value for money to members.
Trustees are also confident of their end game planning, with the overwhelming majority aiming for low dependency/self-sufficiency or a buyout. Along the way to their end game, 22% of small schemes, which have the most to gain from economies of scale, are likely to consider a master trust arrangement or pooled structure arrangement.
Key barriers to consolidation are related to trustee boards’ decision making, or are structural. Understanding the pros and cons of consolidation, for example, was cited as a major hurdle, as was a desire to remain in control of their schemes.
[1] The Pension Protection Fund’s 2020 edition of the Purple Book finds that 36% of private sector DB schemes have fewer than 100 members, while 44% have between 100 and 999 members.
[2] Source: TPR’s 21st Century Trusteeship guide – ‘Value for members’ section.
“Around half of the respondents were from small or very small schemes: 48% of DB scheme respondents, and 52% of hybrid scheme respondents”
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47
of trustees are member nomimated
are on a defined benefit scheme
Trustees breakdown
Schemes Represented
<100
100-199
200-499
500-999
1,000-1,999
2,000-4,999
5,000+
0
20
10
30
40
Trustee breakdown
Employer-nominated trustee
Member-nominated trustee
Professional corporate sole trustee
Defined Benefit
Hybrid
Defined Contribution
Schemes represented
/
Number of scheme members
Percent (%)
5
31
DB
DC
Select a scheme type to view
Trustees took part in our survey"
23
Trustee perceptions are important decision drivers when assessing value and ascertaining whether consolidation is a beneficial option. Boards need to make decisions on the relative advantages and disadvantages of continuing to operate as a smaller scheme, the timescales necessary to achieve an end goal, and the benefits and drawbacks of consolidation options such as master trusts and pooled structures. To gain insight on how trustees see these challenges, Professional Pensions surveyed 102 pension scheme trustees in July/August 2021. Of those, 86 oversaw DB schemes and 23 were responsible for hybrid schemes, while 17 were also attached to DC schemes. Those only responsible for DC schemes were not included.
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10%
20%
30%
40%
Trustees took part in our survey
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Chapter 01
TPR has made it clear that achieving economies of scale is a key goal for trustees, and those that are unable to demonstrate this should seek consolidation. [3] While its focus has been on DC schemes, it has also made it clear that DB schemes should look for scale benefits.
Trustees tend to agree with the regulator that smaller schemes struggle to achieve economies of scale, defined in our survey as the level of cost per member. Their compliance workloads are also a significant burden. In other areas, such as delivering member communications, trustees seem to be more sanguine about size-related issues.
Size disadvantages, and issues ranked
How significant a challenge is compliance?
Our survey identified four clear areas that small scheme trustees feel present them with disadvantages, and two areas where the disadvantages are less clear, although opinions are split.
Areas of disadvantage for small schemes
Please rank the key issues that make it difficult/inefficient to run smaller schemes
Overall cost per member – lack of economies of scale
XX%
Achieving value for money from third party service providers (e.g. investment advice)
Restricted investment opportunities/universe
Dealing with the compliance workload
Offering financial advice to members
Ability to deliver quality member communications
Level of risk to members’ benefits
Other
Trustees felt that this was the number one issue that made it more difficult to run smaller schemes: 91% of respondents said that small scale resulted in a cost disadvantage – including 29% who said it was a significant disadvantage. With many fixed costs spread across a smaller number of people, small schemes tend to incur higher overall costs per member. A 2018 report from the Department for Work and Pensions flagged this issue, stating that “a lack of opportunities to benefit from economies of scale means that small [DB] schemes tend to have higher administrative costs per member and are less likely to benefit from quality investment opportunities, for which advice comes at a premium”. [4]
Clear areas of disadvantage
Economies of scale
Most survey respondents said they perceived smaller schemes as being at something of a disadvantage compared to larger schemes when it came to accessing investment options. However, relatively few (16%) said they were “significantly disadvantaged”. In addition, when asked, most trustees said that they had all the flexibility they needed in terms of access to investment options and asset classes. Instead, some respondents remarked that size-related investment disadvantages mainly related to investment costs and the lack of buying power, rather than access.
Scale is also a major factor when dealing with the significant regulatory requirements on DB schemes, with 69% of respondents feeling that small schemes were 'significantly' or 'somewhat' disadvantaged. Many compliance costs have a fixed cost element, while the limited resources available to smaller schemes mean that the growing workload cannot be easily spread across individuals. Limited budgets also make it difficult to employ compliance specialists.
Restricted investment opportunities
77
said small schemes were 'significantly' or 'somewhat' disadvantaged"
Compliance
As we’ve seen, trustees see compliance as a significant size-related disadvantage. But how challenging do they find the compliance workload? On a scale of 1 (very easy) to 10 (extremely challenging), 31% of our overall respondents scored the management of the compliance workload at 7 or higher, which we felt indicated significant levels of stress.
69
of respondents felt that small schemes were ‘significantly’ or ‘somewhat’ disadvantaged.
How challenging is it for your scheme to manage its regulatory compliance workload?
In answer to a direct question on how much more difficult it is for smaller schemes (under 1,000 members) to deal with compliance workload, compared to larger schemes, most respondents thought it was moderately or significantly more difficult.
Compliance difficulty for smaller vs larger schemes
How much more difficult is it for a smaller scheme with under 1,000 members to deal with its regulatory compliance workload than for a larger scheme with more than 1,000 members?
All pension schemes should be able to identify the services they need – but finding the right provider for their needs and budget is not always as easy as it sounds. Many respondents mentioned the greater buying power enjoyed by larger schemes, though others thought the services market was relatively competitive if smaller schemes targeted the right providers.
“You’ve got a limited pool of people you can approach”
One trustee we interviewed, who wished to remain anonymous comment that: “Some providers have traditionally been pigeonholed as either big scheme or scheme specialists. This largely remains true although we have seen some market movement with most of the larger firms keen to stress that they play at the smaller end and some of the smaller firms becoming more attracted by larger, more profitable, clients. There are plenty of good options for smaller schemes but increased choice is a double-edged sword. As ever, the skill is identifying a scheme’s needs and budgets and matching those with the provider – but are Trustees equipped to do that by themselves?” John Lovell, Director of Governance Services at Independent Trustee Services (ITS) adds: “You’ve got a limited pool of people you can approach, but then you’re in their target market so you’d hope to get a better service and be a slightly bigger fish in that pond.” BESTrustees' Alan Pickering says conditions for small schemes are improving as providers become more flexible with pricing. “Even small schemes are now agreeing budgets with their external service suppliers and these budgets can be as granular as you want,” he explains.
John Lovell, Director of Governance Services at Independent Trustee Services (ITS)
“Even small schemes are now agreeing budgets with their external service suppliers and these budgets can be as granular as you want”
Alan Pickering, President of BESTrustees
BESTrustees’ Alan Pickering points out that it can be difficult for small schemes to put a price on the work they do internally. “There are some very busy people within small schemes who try and slot pension work into their already busy day,” he explains. “They would be quite surprised if they were to try and apply some cost to the time that they’re devoting to pension matters. It’s one thing to get clarity on the external costs, it’s much more difficult to identify the internal invisible costs.”
Internal vs external cost visibility
Member outcome risk
Less clear areas of disadvantage
Some trustees commented that outcome risk – the risk of an employer not being able to fulfil its obligations to the scheme – was not related to the size of the scheme, as it is driven by the strength of the employer covenant and its profitability or cashflow. That said, the size of the scheme relative to the size of the employer was seen by some as a risk driver, as it could influence the amount of attention the scheme received from its sponsor. Furthermore, other trustees felt that smaller employers were likely to be less resilient, and that in some cases smaller schemes may have weaker covenants.
There were mixed views on this area of potential disadvantage. On the downside, some trustees pointed out that smaller schemes lacked the scale to employ communications experts or set up relevant infrastructure such as a dedicated website. However, others felt that smaller schemes were better able to tailor their communications to member needs. Many in this category were adamant that small scale should not limit communication quality. This is reflected in trustees' responses when asked if the size of the scheme is a barrier to improving communications. Respondents rated the adversity level at only 3.59 out of 10 on average.
Size and member comms
To what extent does the size of your scheme hold you back when it comes to improving your member communications?
9
7
91
of respondents said that small scale resulted in a cost disadvantage
scored the challenge of managing their scheme's compliance workload at 7 out of 10, or higher
[3] Source: ‘Why we’re pushing pension schemes out of the market’, blog post by David Fairs, TPR, 2 July 2019.
[4] Source: ‘Protecting Defined Benefit Pension Schemes’, page 30, DWP report, March 2018.
Risk to member outcomes of employer not being able to honour its commitments
Quality of member communications
Ability to offer financial advice to members
Finding competitive third party services (e.g. investment advice)
Ability to deal with compliance workload
Overall cost per member - lack of economies of scale
25
50
75
Somewhat disadvantaged
Significantly disadvantaged
15%
5%
8
6
4
3
2
1
Significantly easier
Moderately easier
Slightly easier
Equally difficult/easy
Slightly more difficult
Moderately more difficult
Significantly more difficult
"It's crippling," of schemes' overall compliance burden, says Alan Pickering, President of BESTrustees. “It’s a nightmare for FTSE 100 companies; it can literally be a killer for a small business. Many small businesses are falling foul of auto-enrolment rules, not through wilful neglect but just through over-burdensome compliance across the whole spectrum of the business that they run.” Hugh Nolan, Director at Spence & Partners, cites the example of documentation needed for investment policies. As a small scheme, he says, “there’s not a lot of influence you have but you’ve still got to produce all the documentation saying you’ve thought about what you can do and that it’s actually appropriate to hold funds where you have no influence”. Nolan adds: “Trustees have to go around the houses trying to sort all that out and say something that is compliant, helpful to members, and doesn’t seem like you’re just throwing your hand up in the air and saying it’s too hard. That’s hugely wasteful.”
Value for money through third-party services
Four clear areas of disadvantage
(1 = very easy, 10 = extremely challenging)
Percentage (%)
Weighted importance score
350
280
210
140
70
"Score is a weighted calculation. Items ranked first are valued higher than the following ranks, the score is the sum of all weighted rank counts."
1 (Not at all)
Percentage (%) of respondents
10 (Significantly)
Score
Average score: 3.59
Trustees felt that this was the number one issue that made it more difficult to run smaller schemes: 91% of respondents said that small scale resulted in a cost disadvantage – including 29% who said it was a signif- icant disadvantage. With many fixed costs spread across a smaller number of people, small schemes tend to incur higher overall costs per member. A 2018 report from the Department for Work and Pensions flagged this issue, stating that “a lack of opportunities to benefit from economies of scale means that small [DB] schemes tend to have higher administrative costs per member and are less likely to benefit from quality investment opportunities, for which advice comes at a premium”. [4]
“It’s crippling,” says BESTrustees’ Pickering of schemes’ overall compliance burden. “It’s a nightmare for FTSE 100 companies; it can literally be a killer for a small business. Many small businesses are falling foul of auto-enrolment rules, not through wilful neglect but just through over-burdensome compliance across the whole spectrum of the business that they run.” Hugh Nolan, Director at Spence & Partners, cites the example of documentation needed for investment policies. As a small scheme, he says, “there’s not a lot of influence you have but you’ve still got to produce all the documentation saying you’ve thought about what you can do and that it’s actually appropriate to hold funds where you have no influence”. Nolan adds: “Trustees have to go around the houses trying to sort all that out and say something that is compliant, helpful to members, and doesn’t seem like you’re just throwing your hand up in the air and saying it’s too hard. That’s hugely wasteful.”
Harus Rai, Head of Sole Trusteeship at Capital Cranfield, comments that: “Some providers have traditionally been pigeonholed as either big scheme or scheme specialists. This largely remains true although we have seen some market movement with most of the larger firms keen to stress that they play at the smaller end and some of the smaller firms becoming more attracted by larger, more profitable, clients. There are plenty of good options for smaller schemes but increased choice is a double-edged sword. As ever, the skill is identifying a scheme’s needs and budgets and matching those with the provider – but are Trustees equipped to do that by themselves?” John Lovell, Director of Governance Services at Independent Trustee Services (ITS) adds: “You’ve got a limited pool of people you can approach, but then you’re in their target market so you’d hope to get a better service and be a slightly bigger fish in that pond.” Alan Pickering, President of BESTrustees, says conditions for small schemes are improving as providers become more flexible with pricing. “Even small schemes are now agreeing budgets with their external service suppliers and these budgets can be as granular as you want,” he explains.
100
Weighted imporance score
Chapter 02
Delivering good value for the money paid for a service is a key focus of regulators across financial services, as highlighted above.
However, despite acknowledging that there are significant diseconomies of scale, an overwhelming majority of trustees (90%) said they were at least somewhat confident that the way in which they operated their schemes offered value for money. That said, there were notable differences when split by size.
Delivering value for money
While 61% of schemes with over 1,000 members said they were “very confident” that they offered value for money, this fell to 32% of schemes with 500 members or fewer. In addition, all but one of the large schemes represented in the survey said they were either “very confident” or “somewhat confident” of offering value for money, while nine of the 37 very small schemes said they were either unconfident or unsure.
How confident are you that the way you have chosen to operate your scheme offers value for money?
We found that around 15% of trustees overall said they had not recently benchmarked the value for money offered by their scheme, rising to 20% for schemes with under 1,000 members. Very few overall (8%) had benchmarked their value for money against master trust arrangements or other forms of consolidation. Instead, most said they benchmarked against non-size-based industry averages or against data from schemes of a similar size. This kind of benchmarking may not offer schemes a good platform for considering the cost benefits offered by new ways of operating, as it is comparing with the status quo rather than the full slate of options that have become available.
Foundations of value
While there is a risk of comparing apples with oranges, economies of scale are achievable. The Local Government Pension Scheme has shown this on the investment side through its multi-year asset pooling project. [5, 6] Respondents were asked additional questions going into more detail on member communications and on access to investments. We explore these in greater detail in our box-out discussions.
Access to investments
Issues cited included minimum investment levels required to access certain types of illiquid assets, and diminished ability to negotiate fees. In addition, several trustees highlighted that larger schemes can invest directly and may have a wider range of investment solutions available to them. Such buying power is rarely available to smaller schemes in isolation.
“I’ve yet to meet a client who has said their scheme’s running costs are too low!”
Our anonymous interviewee trustee argued that trustees must be focused on obtaining value for money from their service providers. “I’ve yet to meet a client who has said their scheme’s running costs are too low! All Trustees should set clear expectation and cost parameters with their service providers and not be afraid to push back where necessary. As with so many aspects of the trustee role the key is communication and it helps no-one to be in a perennial running battle over costs.”
Anonymous trustee, research interview
Some trustees said the issue was not a focus for them as the sponsor footed the bill, meaning that members were not penalised directly for any inefficiencies. As one respondent explained: “Our sponsor pays for all costs and monitors the budget with trustees. Members do not pay for anything meaningful that would impact a value for money measure.”
However, as the overall costs of funding a DB scheme rises with improving longevity and ultra-low gilt yields, efficiencies will help sponsors manage these costs. If companies are being asked to pay deficit reduction contributions on top of regular payments, they may start to scrutinise other charges they are responsible for too. Affordability of the scheme is also inextricably linked to the strength of the covenant. By not managing costs effectively, trustees increase the risk of the employer not being able to fund the scheme and members ending up in the Pension Protection Fund. Ultimately, though, by limiting their cost comparisons to similarly sized schemes as opposed to alternative arrangements, trustees risk missing out on potentially optimising governance structures, improving the security of member benefits, and gaining access to new investment opportunities. One respondent said their scheme tended to rely on “discussions with advisers” to benchmark costs and value.
“Our sponsor pays for all costs and monitors the budget with trustees.”
Trustees are confident on delivering value - but is that because their comparisons are largely vs other similarly sized schemes?
“Schemes have such different rules and covenant support that comparison with big schemes is not that helpful”
Maintaining a high standard of communication is always important to ensure members understand their benefits. It is particularly important at certain life events, such as when leaving a scheme or at retirement. [7] Survey respondents fell into two main groups when asked to rate their schemes’ communication standards. Overall, just over half (51%) awarded a relatively strong score of 7 or 8 out of 10. More than a third (37%) indicated that the quality was “fair but could be significantly improved” with a rating of 5 or 6 out of 10. However, size made a big difference here. A larger proportion of very small scheme representatives awarded their scheme a 5 or 6 (49%).
Two communications areas came out clearly as needing improvement. Just over a third (35%) said they wanted to make communications more specific to each member’s circumstances, while a similar proportion (34%) wanted to modernise their messaging methods using, for example, mobile phone apps and an improved online presence.
Member communications
These were much bigger priorities than more frequent communications (5%), faster reporting of pension statements (9%), or supplying financial education to members through for example blogs and webinars (10%).
35
said they wanted to make communications more specific to each member’s circumstances
34
wanted to modernise their messaging methods
Benchmarking value for money
37
indicated that the quality was “fair but could be significantly improved”
the smaller the scheme, the lower Trustees tended to rate member communications
“Why do you want to engage with members in a DB scheme? What do you want them to do?”
Some trustees in our qualitative interviews pointed out, however, that in some cases communication and engagement was less of an issue for DB schemes compared to DC schemes. “Engagement has a role in a small DC scheme but in a small DB scheme, I’m not convinced that engagement is the biggest problem,” says Kevin Wesbroom, Professional Trustee at Capital Cranfield.
Kevin Wesbroom, Professional Trustee at Capital Cranfield
Just over three quarters of schemes (76%) said they possessed all the flexibility they desired. However, satisfaction varied significantly by size of scheme. 82% of schemes with over 1,000 members were happy with their investment flexibility. Among very small schemes, satisfaction was 20% lower. Furthermore, some key investment areas were thought to be difficult to access: direct property, infrastructure, renewable energy assets, and, to a lesser extent, other types of real assets. These figures also varied by size of scheme. For example, 46% of very small schemes said they had difficulty accessing infrastructure investments, while only 25% of larger schemes concurred.
76
said they possessed all the flexibility they desired
Investment
“For small schemes, maintaining exposure to illiquid asset classes such as infrastructure can be problematic”
Hugh Nolan, Director at Spence & Partners
“For small schemes, maintaining exposure to illiquid asset classes such as infrastructure can be problematic if the trustees are moving towards an endgame such as buyout”, says Spence & Partners’ Nolan. “The long-term nature [of that investment] gets slightly ruined by that,” he says. “That’s where the offerings of a master trust or similar might help, because if there are other people to take your share of it on while you cash out, that might make it easier.” An anonymous trustee interviewee pointed out that there are ways for smaller schemes to ensure a cost-effective investment solution. “Whilst it is true that larger schemes have more direct buying power, the increased use of platform solutions, fiduciary management, professional corporate sole trusteeship and DB Master Trusts has enabled even the smallest of schemes to access more tailored and cost effective investment solutions than have previously been available to them.” By contrast, relatively few trustees in our overall sample perceived it as difficult to invest in areas such as derivatives and other complex investment types – 18% said they felt this was difficult. For environmental, social and governance themed investments and strategies, just 10% saw it as a problem area in terms of access.
46
of the very small schemes said they had difficulty accessing infrastructure investments
Despite many comments lamenting that smaller schemes lacked the clout to negotiate in the same way as large schemes, generally, trustees were happy with their investment flexibility.
[7] See ‘Providing information to members’, TPR guidance to DB trustees.
60%
Against schemes of a similar size
We have not recently explored this
Against industry averages
Against master trusts
Don't know
Member communications rated out of 10
Very small
Small
Large
45%
Count
Very confident
Somewhat confident
Unsure
Somewhat unconfident
Very unconfident
Very small schemes
Small schemes
Large schemes
Infrastructure
Renewables
Derivatives and other complex investment types
None of the above
Direct property
Other real assets
ESG investments
The smaller the scheme, the lower Trustees tended to rate member communications
[5] Written answer in parliament, 21 January 2020.
[6] ‘Border to Coast sure of £250m savings as 45% of assets pooled’, Professional Pensions, 23 July 2021.
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Select a scheme to view
Capital Cranfield’s Rai argues that trustees must be focused on obtaining value for money from their service providers. “I’ve yet to meet a client who has said their scheme’s running costs are too low! All Trustees should set clear expectation and cost parameters with their service providers and not be afraid to push back where necessary. As with so many aspects of the trustee role the key is communication and it helps no-one to be in a perennial running battle over costs.”
While there is a risk of comparing apples with oranges, economies of scale are achievable. The Local Government Pension Scheme has shown this on the investment side through its multi-year asset pooling project. [5, 6] Respondents were asked additional questions going into more detail on member commun-ications and on access to investments. We explore these in greater detail in our box-out discussions.
Chapter 03
TPR’s new funding regime for DB schemes – still in development at the time of writing – is designed to place more importance on journey plans and endgames as the UK’s DB sector matures. [8]
The insurance market for DB schemes has been vibrant for the past few years. While the pandemic delayed some transactions, it also presented some attractive pricing opportunities for those that were well prepared. Between the start of 2018 and the end of 2020, £135bn worth of buy-in, buyout and longevity swap transactions were completed, according to Willis Towers Watson, with 2019’s £55.6bn total a record for a calendar year. [9]
Milestones towards the end goal
Schemes often need to complete various milestones on their way to their end goal. Some of these are conventional and well-established, and represent relatively easy ‘evolutionary’ decisions, while others are relatively new or radical and represent a more profound change of state. Predictably, many of the more conventional milestones proved popular in our sample. For example, internal de-risking of schemes had already been completed by 35% and was being undertaken or likely to be considered by 54%. It was a similar picture for those schemes delegating investment execution to third parties and those streamlining and rationalising their advisers.
“Securing all the benefits with an insurance company, that’s obviously the gold standard”
Some 13% of trustees said they had completed a buy-in transaction, with another 10% saying one was in progress. Buy-ins were thought likely to be considered by a further 45%. “But we have to be realistic: for a small scheme that is 50% funded against buyout cost, is that ever realistic? I don’t think some of the solutions like superfunds are likely to be a realistic solution for some of these schemes. Getting that scheme into a larger vehicle like a DB master trust could well be a pragmatic definition of securing the benefits for those members.” says Capital Cranfield’s Wesbroom.
Our survey found that most respondents are currently aiming either to carry on as they are, with the aim of moving to full funding on a low dependency basis (48%), or to conduct a buyout with an insurer (41%). Relatively few in the whole sample intended to transfer to a superfund. Just 5% of our sample selected this option, rising to 14% for very small schemes. No large schemes selected this option as their end goal.
Just over a third – 34% – hope to achieve their goal in six to 10 years, but for 18% of respondents it is expected to take 11-20 years. Significant numbers are hoping to achieve their end goal much sooner, within three years (16%), or in three to five years (23%).
[8] Source: ‘Quick guide to our defined benefit funding consultation’, page 11, TPR document, March 2020; DB funding code: TPR publishes interim response to consultation, TPR document, January 2021
[9] Source: ‘Looking back at the 2020 UK de-risking market’, Willis Towers Watson report, 19 January 2021.
Despite this, only 4% of respondents said they had completed or were currently undertaking a DB master trust transfer. A similar proportion had joined or were joining another pooled structure, while 6% had completed or were executing an alternative option such as a capital-backed journey plan. For those still mapping out their journeys, around 9% said joining a master trust was likely to be considered, and 7% said the same for pooled structures, and 9% picked other alternative emerging models. Although some of these potential milestones are at an early stage in their industry lifecycle, and require a more radical decision from trustees, our survey results indicate that novel solutions are not yet ‘top of mind’ for most trustees.
Within 3 years
3 - 5 years
6 - 10 years
11- 20 years
More than 20 years
How far away is your end goal?
Milestones to the end game
Join a DB Master Trust
Join a pooled structure e.g. Stoneport
Execute on an emerging model e.g. a capital-backed journey plan
Insurer buy-in
Already completed
Currently being undertaken
Likely to be considered
Unlikely to be considered
See breakdown
Close breakdown
Buyout
Low dependency/ self-sufficiency
Superfund
What is your end goal for your scheme?
Just over a third – 34% – hope to achieve their goal in six to 10 years, but for 18% of respond-ents it is expected to take 11-20 years. Significant numbers are hoping to achieve their end goal much sooner, within three years (16%), or in three to five years (23%).
Chapter 04
Trustees remain optimistic about the possibility of reducing costs while also improving member outcomes. Almost three quarters (73%) said they either somewhat or strongly agreed that achieving both outcomes was possible, in principle.
Philosophical and structural
Meanwhile, a third of respondents said they lacked employer support (34%) or adviser support (15%) for such a consolidation move. “Trustees perhaps don’t want to lose control of their scheme – they quite like the idea of making the decisions that affect individual members,” says Spence & Partners’ Nolan. “If it goes to a traditional master trust, they can’t do that any more.” “Even if trustees are willing to cede control, employers may not be”, he adds. “Employers may be concerned about having less of an input on investment strategy, which affects deficit calculations and therefore their contributions.”
Decision making and preparation
“Trustees perhaps don’t want to lose control of their scheme”
Small schemes tended to have more difficulty understanding the pros and cons, with 67% citing this versus 57% for large schemes. They were slightly more concerned about data preparation, while larger schemes tended to be keener to remain in control of their own destiny and to be more cynical about the cost benefits of consolidation. Getting the right advice seems to be the best way of negotiating these barriers and taking the best steps along the path to the end goal.
“Securing member benefits depends on having good quality data”
Respondents highlighted two key barriers relating to robust decision making.
“The ones that are on their journey to the ultimate destination are starting to think about DB master trusts, consolidation and buyout”
So why have more schemes not considered consolidation strategies, such as joining a master trust or a pooled structure? Grouping together schemes can help to overcome trustees’ top perceived challenge – a lack of economies of scale. Our research revealed several factors are causing this hesitancy, which fall into two groups. The new generation of consolidators are attempting to address many of these concerns, in order to make the path to consolidation easier.
Over half (53%) of respondents said they wanted to remain in control of their scheme’s destiny, showing a reluctance to delegate key functions.
(Interestingly, in a separate question, 49% strongly or somewhat agreed with the idea that some trustees might resist consolidation in a master trust because it would end their position as a trustee. However, 24% strongly disagreed with this notion – opinions are clearly divided.)
60% of our respondents said that understanding the complex pros and cons of the consolidation decision was an important barrier to considering consolidation. Meanwhile, 45% said the preparatory work involved – data cleansing, for example – was also an important barrier. BESTrustees’ Pickering highlights that, whatever option trustees ultimately choose, “securing member benefits depends on having good quality data”. Achieving this can, in turn, depend on the level of financial support either within the scheme or the employer covenant.
The right consultant will help a scheme “compare and contrast” different options such as a master trust or superfund, Pickering adds. While a master trust or other consolidation option will not suit every scheme, it will suit some. Trustees must ensure they are well enough informed to decide which side of the fence they fall.
Strongly disagree
Somewhat disagree
Somewhat agree
Strongly agree
How much do you agree with the following statement: “It’s possible to reduce costs while also improving member outcomes.”
Which barriers are the most important ones to overcome when considering a consolidation strategy, e.g. joining a master trust?
Understanding pros and cons
Desire to remain in control
Amount/cost of prep work
Lack of employer support
Cost benefits are not transformational
Lack of adviser support
It is clear from our survey that there are challenges facing small pension schemes – defined as those with 1,000 members or fewer.
Primarily, these relate to a lack of economies of scale. Small schemes find it harder to access the right investments at the right cost, manage the regulatory burden and find competitive third-party services. When we asked trustees to rank the main potential benefits of consolidation, they placed economies of scale/cost savings at the top of their list.
"There is in fact a very clear case to be made for pooling resources, and to do so could soothe several headaches for trustee boards"
Economies of scale were distinctly ahead of other potential benefits, such as access to a more sophisticated investment strategy and reduced risk of members not receiving their full benefits. These in turn were well ahead of the remaining options.
In relation to master trusts, over half of respondents were simply unsure whether they agreed with the statement that “master trusts are able to deliver substantially reduced costs while improving member outcomes”. Likewise, most trustees said they were unsure (44%) or would find it difficult (a further 26%) to assess the relative risk to member outcomes of continuing to go it alone as a scheme, versus adopting a consolidation strategy. There is in fact a very clear case to be made for pooling resources, and to do so could soothe several headaches for trustee boards, particularly those running small schemes. The key reason that trustees are so unsure of the value of consolidation is because, as our research shows, schemes haven't explored this option, and they haven't explored it chiefly because they are limited to comparing themselves to other similar schemes as opposed to alternative arrangements. The business case for consolidation is evident and the gains are there for the taking. The ball, however, is in the trustees' court.
What do you perceive as the main potential benefits of consolidation?
Economies of scale/cost savings
More sophisticated investment strategy
Reduced risk for members
Improved oversight
Benefits to employers
Improved member services and engagement