Last week, I was a guest speaker on a panel at SG Pensions enterprise masterclass debating whether pension consolidation will deliver real efficiencies to companies going forward. The conversation we had is definitely worth sharing. This is about raising governance standards for the benefit of members and improving their outcomes in retirement.
As background, consolidation in the UK pension industry is a hot topic. Consolidation in this context effectively means that a lot of companies are moving or considering switching their pension schemes into a different type of scheme called a master trust.
Robert Branagh, CEO of London Pensions Fund Authority, introduced the topic, discussing why companies would move to a master trust, explaining that it’s in pursuit of efficiency gains, economies of scale and wider investment opportunity sets. And made the point that companies are strongly encouraged by the authorities to do so.
And this has been reflected in what we’ve seen so far this year at Smart Pension, it’s a very exciting time to be in the industry. We’ve seen a large increase in trustees and employers running smaller trust-based pension schemes (particularly those with less than £100m assets under management) getting in touch with us about switching to Smart Pension.
There are two key barriers we see when companies are thinking about moving a scheme to a master trust.
1. They’re worried that the quality of the data in their existing scheme is poor and not good enough to move to a master trust.
We see companies trying to get to 100% data quality before moving schemes, which makes them reluctant to get started, or they delay, fearful that they’re going to be judged and get a C– versus an A+. But to be honest, the data doesn't have to be perfect, 80% is good enough. When upgrading to Smart Pension I always say we can work together to improve the quality of data over time to get to 100% – no data is perfect.
2. They’re worried that it’s going to be too expensive to switch.
My reply to this is always – why incur costs when you don’t need to? Simple economies of scale mean that if a smaller trust-based pension scheme switches to a larger master trust, the costs of running the scheme are much less because they are spread across larger numbers of members. You can cut costs without cutting corners and, in many cases, you can get much more for much less with a master trust.
If you, or your scheme, are paying for your own trustees, your own governance, your own scheme administration and your own investment strategy, chances are you, or your members, are paying too much.
There will be some costs when switching and upgrading any scheme and some of these costs can’t be removed. If all parties share the cost, for example, the new provider picks up some of the costs, the administrators and other pension advisers – that makes the exercise and the transition as efficient as possible. Everyone working together should be the focus.
My view is that these new regulations will force the question of why would you spend money updating your scheme? Integrated up-to-date technology, improved investment strategies and better governance can be found in a master trust, straight out of the box. It’s worth a bit of effort to understand your options and run the numbers to see what moving to a larger scheme could save you in the medium to long term.
It’s not all about efficiency savings for the company – think of the member and their retirement savings.
Smart Pension always focuses on delivering value for money and delivering better member outcomes. If you do save money by moving to another pension scheme and also improve the offering to the member, put those additional costs back in for their benefit.
Ask yourself, will a pension scheme just survive, or can it thrive? If we don't put the member at the heart of the decisions, what's the point in a scheme continuing for the sake of it? Ask yourself, when was the last time you reviewed your scheme? Are there other pension schemes that offer better value for money for your company and your employees? A key thing at Smart Pension is that we always stress is to remember that all pension schemes big or small, have the members retirement savings in them and we want to avoid schemes folding.
So to sum up, if smaller pension schemes are consolidated to master trust schemes and the members have better outcomes in their retirement. Then our view is that it 100% has got to be the right thing to do. If you want to discuss further over a coffee, get in touch.