In search of a lasting settlement

The government does not, however, want to design and run them, and they are not convinced that compulsory consolidation is a ‘proportionate response’. There may though be encouragement, including requirements for DB schemes to publish information on their costs and charges. 

The Green Paper also mentions that consolidation could be combined with widening the rules for the payment of winding-up lump sums (WULS) and simplification of members’ benefits. 

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Relaxation of trivial commutation rules is suggested too, as is rationalising rules on indexation of pensions, allowing schemes to move from RPI to a more modern measure of inflation for increases.

Evidence of the potential savings from consolidation and simplification can be found in JLT’s own research. We found that consolidating defined benefit (DB) pension schemes into master trusts could cut employers’ costs by £500m a year collectively.

The £500m 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 Pensions and Lifetime Savings Association (PLSA). This would equate to total savings of £10bn 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 schemes 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.

DB schemes: facts & figures

   There are 5,794 DB schemes. 

   £1.5 trillion under management.

   There are 11 million members in a DB scheme.

   Average DB pension is £7,000 p.a.

   In the last 10 years, active memberships have declined by more than 50%.

   Only 13% of DB schemes open to new members.

   About 90-95% of schemes in deficit on Technical Provisions basis.

   Average recovery plan is eight years.

   Around 5,000 schemes have less than 1,000 members.

   75% of schemes refer to RPI in respect of post-97 pension indexation.

Preliminary conversation

To conclude, the Green Paper is, as many others in the industry have alluded to, "very green", a preliminary conversation rather than real consultation, and almost devoid of any real direction of travel in terms of future policy. Also, when considering the factors affecting the funding of and deficits in DB schemes, life expectancy, economic uncertainty and investment returns are highlighted.