Having your pensions cake and eating it

The pen­sions indus­try has long grap­pled with a cost prob­lem: the small­er a pen­sion scheme is, the high­er the per mem­ber costs of run­ning the scheme.

“There’s a whole range of costs across a pen­sion scheme, although invest­ment man­age­ment charges were prob­a­bly the light­bulb moment for us,” says Mark McClin­tock, a part­ner in Deloitte’s pen­sions con­sult­ing busi­ness. “Why should a pen­sion scheme with £10m of assets pay a high­er annu­al man­age­ment charge than a pen­sion scheme with £100m of assets with the same fund man­ag­er in the same fund?”

That uneven back­drop is dri­ving con­sol­i­da­tion across the pen­sions indus­try in an effort to lev­el the play­ing field for small and medi­um-sized pen­sion schemes. The aim is to reduce their costs and enable them to ben­e­fit from the same economies of scale that larg­er pen­sion schemes enjoy.

One poten­tial snag is that con­sol­i­da­tion has tra­di­tion­al­ly meant employ­ers and trustees have been forced to relin­quish con­trol of their schemes in order to merge their assets with a con­sol­i­dat­ed fund.

“To access a vehi­cle that allows you to con­sol­i­date, you typ­i­cal­ly have to give up something—and that, if you’re an employ­er, is essen­tial­ly loss of con­trol,” says McClin­tock. “That mat­ters because employ­ers will have a trustee board that over­sees their pen­sion fund and they will know them and under­stand how they act; there are no sur­pris­es.”

Under that rela­tion­ship, employ­ers main­tain influ­ence over the scheme’s invest­ment and fund­ing strat­e­gy — and there­fore have more con­trol over how fast the scheme pro­gress­es to a ful­ly-fund­ed sta­tus.

“If you go into a con­sol­i­da­tion vehi­cle, you don’t con­trol who the trustee is and you lose the abil­i­ty to have your own autonomous plan,” says McClin­tock.

That struc­tur­al imped­i­ment, which has tra­di­tion­al­ly deterred small­er schemes from con­sol­i­dat­ing, was the cat­a­lyst for Deloitte cre­at­ing the Deloitte Pen­sions Mas­ter Plan (DPMP). This is a pen­sion plan that allows defined ben­e­fit (DB) schemes to pool their assets with­out ced­ing con­trol.

“The key design fea­ture we came up with was allow­ing pen­sion funds to lift and drop into our plan with a scheme’s exist­ing trustee in place,” says McClin­tock. “That means there is no loss of con­trol, which is a unique propo­si­tion in the mar­ket. We believe no oth­er DB mas­ter trust has this fea­ture — you get the trustee that attach­es to that con­sol­i­da­tion vehi­cle. That’s a big bar­ri­er for a lot of small and mid-size pen­sion schemes.”

DPMP solves this by hav­ing each scheme that ‘drops’ into the fund remain­ing as a sep­a­rate enti­ty with its own trustee board. That means trustees main­tain their exist­ing pow­ers, includ­ing invest­ment dis­cre­tion. There is also a cen­tral pro­fes­sion­al trustee sit­ting at the core of the Mas­ter Plan who is respon­si­ble for over­sight of the fund as a whole and can be called on if need­ed, for instance if a scheme’s trustee is fac­ing a par­tic­u­lar­ly dif­fi­cult deci­sion and they want a sec­ond opin­ion from an expe­ri­enced prac­ti­tion­er, says McClin­tock.

Aside from main­tain­ing con­trol, the oth­er main ben­e­fit of this struc­ture is that it can dri­ve down costs for small and medi­um-sized pen­sion schemes by pool­ing all of the schemes’ assets with­out break­ing the seg­re­ga­tion of each indi­vid­ual scheme sec­tion. Deloitte kick-start­ed the plan by pool­ing the assets of its own defined ben­e­fit scheme, giv­ing the Mas­ter Plan suf­fi­cient scale to imme­di­ate­ly help mem­ber schemes reduce their costs. Ini­tial­ly, typ­i­cal reduc­tions in invest­ment costs were around 30% but that has since risen to more than 50%, McClin­tock says.

“As the Mas­ter Plan gets big­ger, the abil­i­ty to dri­ve down those costs con­tin­ues to grow, so it becomes a club where the peo­ple who are already in it ben­e­fit as oth­ers join,” he says. “And, of course, the more you reduce the cost, the more mon­ey stays in the fund and so that dri­ves bet­ter fund­ing over time and bet­ter out­comes for mem­bers.”

Robert Hugh­es, chair­man of Hugh­es Elec­tri­cal and one of the DPMP’s mem­bers, says the cost sav­ings of a DB mas­ter trust and the abil­i­ty to retain its exist­ing trustee board and man­age its own invest­ment strat­e­gy were the chief moti­va­tions for join­ing the plan. Oth­er com­pa­nies have also signed up to diver­si­fy their work­place pen­sion schemes.

“Work­ing with Deloitte, we devel­oped and launched the BT Hybrid Scheme, a blend­ed defined ben­e­fit and defined con­tri­bu­tion scheme, based on the DPMP. We’re delight­ed with the scheme: for mem­bers, it pro­vides greater income cer­tain­ty and is easy to use; and for BT it’s cost effec­tive and reduces risk,” says Ker­ry Shiels, pen­sions direc­tor at BT Group.

The DPMP will typ­i­cal­ly ben­e­fit all small and mid-sized DB schemes. That could be any­thing up to £500m of assets, espe­cial­ly if those assets are split across sev­er­al invest­ment man­agers where the scheme would quick­ly lose the ben­e­fit of scale. The size of the poten­tial mar­ket in the UK for DB schemes that fall under this umbrel­la is around 3,000.
“We’re find­ing that even get­ting to sev­er­al hun­dred mil­lion of assets, the cost sav­ings are real­ly quite sig­nif­i­cant, par­tic­u­lar­ly on the invest­ment side,” says McClin­tock.

The dri­ve for more inno­va­tion in the pen­sions indus­try comes as the Depart­ment for Work and Pen­sions (DWP) seeks to encour­age the con­sol­i­da­tion of DB pen­sion schemes where it can ben­e­fit the schemes by reduc­ing costs, enabling more effec­tive invest­ment strate­gies and improv­ing gov­er­nance. The intro­duc­tion of the DB mas­ter trust self-cer­ti­fi­ca­tion regime, for instance, enables employ­ers that are con­sid­er­ing con­sol­i­da­tion to com­pare schemes through self-cer­tifi­cates host­ed on the Pen­sions and Life­time Sav­ings Asso­ci­a­tion web­site.

“The pen­sions indus­try has had rel­a­tive­ly lit­tle inno­va­tion in the past, so when some­thing new comes along that seems to move the goal­posts quite sub­stan­tial­ly peo­ple are nat­u­ral­ly scep­ti­cal. But one of the ben­e­fits of the self-cer­tifi­cates is to have more infor­ma­tion avail­able and make this feel a bit more real for employ­ers,” McClin­tock says.

DWP’s sup­port for the cre­ation of self-cer­tifi­cates, and the infor­ma­tion they pro­vide to employ­ers and trustees, will be crit­i­cal in help­ing build trust when com­pa­nies are weigh­ing up new ways of man­ag­ing their pen­sion schemes and max­imis­ing the ben­e­fits of con­sol­i­da­tion.

For more infor­ma­tion about the Deloitte Pen­sions Mas­ter Plan please vis­it dpmp.co.uk

Pro­mot­ed by Deloitte