Thought / 06 Mar 2018

IS DB Consolidation the right way forward?

There are possibly around 5,500 defined benefit plans still running in the UK.  Many of these are quite small (less than say 1,000 lives) and mainly closed such that they are a legacy liability rather than forming part of the pay package for current employees.

The advocates of consolidation believe that these plans could be run more effectively and more efficiently if they were combined together. This argues that their problems are caused principally by the smaller size. Our view is that larger plans have just as many problems as smaller plans and that consolidation is unlikely to solve the current problems which all pension plans will face in the next few years.

In most regards, the current market operates efficiently providing all plans with a significant choice of service providers and advisers – generally at more competitive prices than at any point in the past.  Furthermore, access to a wide range of investment classes and protection strategies through pooled funds at a competitive price is now common place. The continued expansion and growth of Professional Trustees means that there is a straightforward “fully delegated” approach for these legacy pension liabilities.

Likely number of years that DB plans will have substantial liabilities.
Number of years within which supply of advisers will significantly diminish.

The one area where there may be considerable savings is around operational and management costs.  Many plans have fixed overheads (Reporting, Advisory, Governance) and these would be significantly reduced as a result of Consolidation.

However, we do believe that the true extent of the problems has not yet emerged and while the market operates efficiently at the moment, it is likely to see significant resourcing stresses at some point in the future. Many plans are likely to have substantial liabilities for at least the next 30 years but the supply of advisers will almost certainly diminish significantly within the next 10 years.

Hence, a solution is needed either through technology, legislation or possibly the consolidation of DB plans at some point in the future.

John Herbert

Chief Actuary