Defined Benefit 

Altmann calls on government to push pension scheme mergers

Altmann calls on government to push pension scheme mergers

The government should encourage defined benefit (DB) pension schemes to consolidate so they can take advantage of economies of scale, Ros Altmann has said.

The former pension minister said schemes should group together to cut down on cost, especially administrative and investment management costs.

Figures published by the Pensions and Lifetime Savings Association (PLSA) in December showed smaller DB schemes (those with less than 5,000 members) had almost double the running costs of larger schemes, at £868 per member compared with £479 per member at their larger counterparts.

The PLSA said this was because larger pension funds were cheaper to run as they could spread fixed costs such as administration, communication, governance, regulatory compliance and investment among more members.

Ms Altmann said: “I would expect to see more moves to consolidation among DB schemes coming through in 2018. 

“I hope that more schemes will join together to take advantage of the economies of scale and administrative or investment management cost savings that can result from scheme mergers.”

Ms Altmann said further consolidation could also allow pension assets to be used for investment in infrastructure which, in turn, could boost growth and social housing.

But David Brooks of pensions consultancy Broadstone, told FTAdviser last February infrastructure was ill-fitted to DB schemes because it was completely uncorrelated to liabilities. He described the asset class as "pie in the sky".

The government published a green paper on 20 February, in which it outlined a series of proposals for managing DB schemes, including consolidating them into a 'super fund' to lower the costs of servicing them, and allowing struggling businesses to sever the link to minimum annual increases based on the retail prices index.

But Ms Altmann said the measures did not go far enough.

She said: “The Department for Work and Pensions produced its response to the consultation on sustainability of UK DB schemes, which said they are broadly affordable and that on average companies ‘can’ afford these benefits. 

“This air of complacency has been rather undermined by subsequent announcements [of pension scheme closures]."

DB schemes announcing closures last year included British Airways, the university scheme USS, Royal Mail and British Steel.

Ms Altmann said: “A new white paper is due soon and this may take a more realistic view of the challenges facing employers in the current exceptionally low interest rate environment.”

Ms Altmann said local authority schemes would be pooling their assets and other schemes could join these new pools so they can “invest in a more diversified range of investments" which would allow them to "benefit from more opportunities for returns while also controlling risk".

“The trend in bond yields is likely to be upward in the coming year therefore pension schemes need to diversify more broadly and to move away from an over-reliance on fixed income at a time when interest rates seem more likely to rise than fall,” she said.