Barnett Waddingham's Steve Hitchiner examines existing DB pension consolidation arrangements common in the charity sector, including public sector schemes, NAMES, and DBMTs. He outlines the key actions organisations should consider taking.
An important recent development for Defined Benefit (DB) pension schemes has been the emergence of new options for consolidation and risk transfer. The innovative transfer of members from the Church Mission Society Pension Scheme to Clara-Pensions, the UK’s only operational DB superfund in June is one such example, and it is expected that other new solutions will be entering the market soon.
But against this backdrop, it is also important to focus on existing, legacy consolidation vehicles, and whether these continue to deliver the right solution for members and sponsors of DB pension arrangements in the Charity and not-for-profit sector.
Existing consolidation arrangements
There are various forms of existing DB consolidation which may be in place, which are particularly common in the Charity and Not-for-Profit sector:
Public sector pension arrangements
Due to the nature of their work, many Charities and Not-for Profit organisations will find themselves participating in public sector pension arrangements, such as the Local Government Pension Schemes (LGPS) or Teachers’ Pension Scheme (TPS).
Non-Associated Multi-Employer Schemes (NAMES)
These are arrangements where assets and liabilities are pooled between a number of unconnected employers, with each employer jointly responsible for the liabilities of other employers. In some cases, this can result in significant risk for an individual employer.
Examples of NAMES include various schemes operated by TPT Retirement Solutions (e.g. Social Housing Pension Scheme, Growth Plan, Independent Schools Pension Scheme) and the Church of England (e.g. Church Workers Pension Fund).
Defined Benefit Master Trusts (DBMTs)
Under a DBMT, each employer has their own segregated assets and liabilities which they are responsible for, but trusteeship, investment management, consultancy advice, and administration services are typically ‘bundled’ into a single provider. Whilst this can offer lower costs for the sponsoring employer through economies of scale, it can also lead to a loss of control and flexibility, and make it more difficult to address issues with individual aspects of the service.
Examples of current DMBT providers are Aberdeen, Citrus, Mercer, and TPT Retirement Solutions, although the market is constantly changing, and new innovations in this area are common.
Actions to consider
For those sponsoring or participating in existing DB consolidation arrangements, there are a number of possible actions to consider:
- Understand your risks and obligations. Unlike DB superfunds or a full insurance buyout, most existing consolidation arrangements will leave the sponsoring employer responsible for financing any deficits that arise. In some cases, this can also mean joint responsibility for the obligations of other employers.
- Review performance. Consider whether the arrangement is delivering on its strategy, and whether the strategy still meets your objectives. Review any fees that are payable, and whether these continue to represent good value for money.
- Review investment returns. Poor investment performance can result in higher contributions, so make sure the investments are delivering as expected, and that you understand the reasons for any underperformance.
- Re-assess strategic priorities. The DB landscape has changed significantly in recent years, with improved funding positions, greater competition in the insurance market, and a wider range of options emerging. Against this background, it is important to re-assess your long-term strategy for your DB pension liabilities.
- Investigate alternative options. Improvements in DB funding levels may mean that alternative options, such as a DB superfund or insurance company solution, are now viable. Other alternatives, such as managing the pension arrangement yourself, may also be preferable. The terms and criteria for exiting an existing consolidation arrangement can be complicated, so it is important for this to be understood.
- Take advice. Consolidation arrangements are typically complex and can expose sponsoring employers to significant costs and risks. Speak to an expert to make sure you understand the issues and your options.
If you would like to discuss any of the issues raised in this article, please contact Steve Hitchiner or Adam Poulson from Barnett Waddingham.