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Punter Southall Group
Consolidation cuts both ways
Like many other companies in our field, we gave our two penn’orth when invited by the government to comment on its proposals to facilitate consolidation in defined benefit pensions.
Or, to put it another way, we welcome the principle of bigger is better (i.e. simpler, cheaper to run, less likely to fail) when it comes to bolstering the foundations of the UK pensions system.
But we do take issue with some of what appears to be the proposed practice. In short, there is no one-size-fits-all approach to effective husbandry in the pension world. Each scheme has different characteristics and needs and any legislation needs to reflect this.
Basically, the government is exploring the question of whether or not assets of some funds should be allowed to be pooled into “super funds” which would be cheaper to manage (reducing duplication of charging, accessing better rates by virtue of greater scale) as well as being supported by third party capital, rather than their historic employer.
The argument goes that if the scaffolding is sturdier, this option offers more protection to distressed or vulnerable funds to be able to continue paying benefits without recourse to the fund-of-last-resort: the Pension Protection Fund.
It also means those funds who have no means of affording an insurance company buy-out have an alternative way forward.
The last 30 years in this field has given us some insights into this. We are already seeing consolidation in the business of managing pensions as bigger providers and advancing technology do more for less. Simply put, margins are being shaved year-on-year.
And we think that’s a good thing. When software can do the job today of what used to be a roomful of people and spreadsheets yesterday, charges will inevitably come down and consultancies have to think hard about new ways to add value (that challenge will continue).
But this should not remove the need for actuaries and investment consultants to be able to offer solutions tailored to the particular requirements of a scheme. Anything that militates against this kind of flexibility needs to be reviewed carefully.
Consolidation cuts both ways. As proposed, it could act as an effective safeguard, building up a solid asset base more resistant to the threats roaming the pension landscape. Conversely, it could also contribute to the uncertain climate. If a hundred funds deemed to be better, together were combined, would it not increase the risk (which would now be correlated) of them falling over, posing a further risk to the PPF?
The arguments around Solvency II for pensions have been well-rehearsed and I don’t intend to revive them suffice to say that insurance and pensions continue to be similar but certainly not identical.
Consolidation has been gathering pace for some time on the supply side and with funds themselves, especially in the public sector, like local government. Responding to this direction of travel with broader proposals is positive but it needs to take into account the unique nature of many schemes.
And that means putting in place a “light-touch” framework that enables an innovative approach to managing funds which, as we would have told you thirty years ago, have another thirty more years in front of them.