Article / 22 Feb 2021

Operational consolidation: the future of DB pension schemes

Insight shared by:

Gateley Legal

As the demands of running standalone DB pension schemes increase, many sponsors and trustees are looking at alternative operating models in order to improve governance or reduce costs.

Most of these models work on the principle of consolidating schemes to gain economies of scale and tend to fall into two main camps:

Two main types of consolidation schemes

  1. Operational consolidators (e.g. service platforms or master-trusts) that run schemes collectively but retain the financial link to each sponsoring employer.
  2. Financial consolidators which, in addition to operational consolidation, allow an employer to walk away from any future financial responsibility, in return for the payment of a significant covenant premium. The new “superfunds” fall into this camp. 

The industry is watching to see if the financial consolidator model takes off and, if it does, it could end up being the ultimate endgame for some schemes currently joining operational consolidators.  

For now, operational consolidation is seen as the answer for those companies and trustees who want to improve governance, resolve conflict issues and benefit from significant economies of scale in the procurement of services.

Operational consolidators are broadly split into two approaches:

  1. Master-trusts – where assets and liabilities are legally transferred into a single ‘umbrella’ trust, but each scheme is operated within its own section of that trust.
  2. Pension Platforms – where schemes are operated collectively on a ‘platform’ approach using common governance and service providers, but each scheme retains its own original, legally separate trust.

There are a number of advantages and disadvantages of the operational consolidator route.

On the positive side, operational consolidation brings efficiencies in services and governance created from running a group of schemes collectively. Service efficiencies arise from harmonising scheme processes and pooling assets to achieve lower fund manager costs. At the same time, using common governance (in some cases) and advisers to speed up decision making brings governance efficiencies and reduces time spent on trustee education. Continuous governance models are employed in some cases to improve decision making efficiency further.

However, there are two main perceived disadvantages of operational consolidation. First, under some models, links to historic trustee knowledge can be lost. Secondly, employers can perceive a loss of control in transferring the governance of a scheme from a long-standing trustee board to a new professional trustee. Both of these issues can be mitigated through choosing the right model for you and agreeing certain ground rules upfront with your new provider.  Existing trustees with significant knowledge who wish to remain involved could form a pensions consultative committee for a set period of time, perhaps the duration of the actuarial valuation process.  

Concerns about a perceived loss of control could be addressed by opting for the platform model ahead of a master trust owing to the ease of reversibility.

Are you interested in reducing the time and money you spend on looking after DB pension schemes?

We operate an operational consolidation platform known as Enplan through our pension scheme trustee company, Entrust. More information about Enplan can be found here.