What you need to know about DB superfunds

The collapse of a number of high-profile DB schemes, including BHS and Carillion, prompted politicians and the regulators to re-evaluate how the underlying systemic risks that might affect remaining schemes could be mitigated.

A raft of consultation papers, policies and white papers have been issued, designed to make the corporate pensions world a better, safer place and to boost the chances of being able to secure members’ benefits in full.

The line in the sand

This is to be achieved by improving the quality of governance, risk management and ultimately, the funding of the schemes’ liabilities.

A year ago, the Department for Work and Pensions issued its ‘Protecting Defined Benefit Pension Schemes’ White Paper, in which it outlined its belief that some pensions schemes – in particular smaller and medium-sized ones – could benefit from consolidation.

Consolidating these schemes – in effect pooling their resources with those of others – would give them access to economies that allow them to access better governance or scheme-specific investment strategies and higher quality – and cheaper – administration.

Moving to a consolidator may be a big move for the scheme trustee and plan sponsor.

A lot of schemes are struggling to retain trustees and have succession planning problems.  

Schemes are having to manage a plethora of service providers, including administrators, actuaries and investment consultants, the costs of which are not going down.

Significant major projects, such as GMP equalisation, add to the cost pressures and are often disproportionate for smaller schemes.

With 4,000 of the UK’s 5,500 schemes having fewer than 1,000 members and £100m in assets, this surely makes the economies of scale benefits offered by consolidation a more viable option.

What can a consolidator offer?

DB consolidators are, in effect, a one-stop shop for sponsors that are struggling to manage their scheme on their own.

They offer sponsors a comprehensive service package, providing all the services required to run an occupational pension scheme.

Sponsors can gain access to all of these functions at a very competitive price, reducing running costs by anything up to one third, and possibly more.

There is also no need for sponsors to commit so much management time to overseeing the scheme – days and weeks can be reclaimed and directed towards what directors do best, which is running their business, safe in the knowledge that their scheme is being managed by specialists.

Taking the leap

Moving to a consolidator may be a big move for the scheme trustee and plan sponsor.

Employers have sought to retain control of their DB scheme because they want their workers to have a meaningful income in retirement.