Consolidation in the defined benefit (DB) sector could increase pension scams, according to Royal London Consulting Actuaries.
In its submission to the work and pensions committee inquiry on the government’s DB white paper, the actuary firm said consolidation may not be the best approach for most plans.
In March, the Department for Work and Pensions (DWP) revealed plans to promote consolidation in the DB pension market, in which two thirds of the 5,600 schemes have funding shortfalls.
But Royal London Consulting Actuaries, which is part of the Royal London mutual provider, said a consolidated scheme was unlikely to have any direct link to the member’s employer, lives or localities.
"This disconnect could make members more prone to accept scams," the firm argued.
Royal London also explained that 80 per cent of schemes have less than 1,000 members, with an average of 214 members per plan.
It said: "Hence creating a consolidated scheme of say 10,000 lives would require perhaps 50 separate schemes, trustees and sponsors to agree to join before it became viable.
"Gaining the agreement of 50 sets of trustees and for 50 sets of employers to achieve a common funding level by a particular date would be difficult."
The actuary firm also noted consolidation might not reduce costs, since according to a report from the Pensions and Lifetime Savings Association schemes with more than 10,000 members have 22 per cent higher per member costs than pension funds with members between 5,000 and 9,999.
Pension scams have increased since the introduction of pension freedoms in 2015, even though the full extent of these is still unknown.
Margaret Snowdon, chair of the Pensions Administration Standards Association (PASA) and of the Pension Liberation Group, estimated pension savers have lost more than £1bn to scams.
The Pensions Regulator has admitted it may never be able to identify the scale of pension scams.
It has been reported that fraudsters are also using social media, such as Linkedin, to find the next victims of their pension scams.
Following the publication of the DWP's white paper Alan Rubenstein, former chief executive of the Pension Protection Fund (PPF), was the first to act on DB consolidation by launching the Pension Superfund, which will accept bulk transfers from final salary plans and consolidate them into one occupational pension scheme.
But the new scheme will only take in pension funds that are fully funded.
A second consolidator, Clara, is being created and is expected to come to market in the next few months.
Instead of consolidation, Royal London proposed the pooling of services, which avoids the identified problems by enabling schemes to choose what they pool and when, and the ability to switch service provider if that service is not good enough, whilst retaining the link between members, trustees and sponsor.
The firm added: "Consequently, pooling of services offers a faster and more pragmatic approach to improving the governance, investment opportunities and operational costs of schemes."
maria.espadinha@ft.com
