Steve Simkins, Head of Public Service Pensions, provides an overview of multi-employer schemes and evaluates their effectiveness in today’s pensions world.
You might have expected the government’s pension consolidation agenda to be music to the ears of the UK’s long-standing multi-employer schemes, but this is not necessarily the case. Whilst you might think they will look to fill the superfund space, they come from a different place and operate in very different way.
For many years there has, been a good number of multi-employer pension schemes in the UK providing pensions on behalf of thousands of employers. Admittedly some of these are unfunded public service pension schemes with limited access. Others are Local Government Pension Schemes, which are funded public service pension schemes with public and private sector employers in them, and some are trust based. Some of the well-known trust-based examples are the Universities Superannuation Scheme ( “USS”), the Railways Pension Scheme and the Social Housing Pension Scheme (“SHPS”). Typically, these scheme have been set up to serve a sector, as their names suggest, together with plumbers, the motor industry and others.
There are a variety of reasons for the new defined benefit consolidation agenda – including efficiency, effectiveness and helping employers find an alternative ‘end game’. Let’s consider the existing multi-employer schemes in this context
Efficiency is good
There is no question that the existing multi-employer schemes have delivered efficiency. They are very large schemes with low per member costs, and most of these schemes have also made life easier for their employers by managing actuarial valuations, investment strategy, governance and any required changes centrally. Furthermore, in many cases employers don’t take pensions advice, in part because their options are restricted.
But what about effectiveness?
When these schemes were set up, the world was very different. Integrated Risk Management (IRM) – making sure that the funding, investment risks and employer covenant are managed together – was unheard of. In fact, neither was The Pensions Regulator. For many multi-employer schemes, their employers were very similar, operating in a pre-privatisation environment (consider how government funding for universities has reduced and their need to commercialise has increased as a result). Given the fundamental changes to the pensions regime in recent years - and to the employers - a one-size fits all pension scheme struggles to deliver.
A great example of good IRM is a strong housing association which would like to use their assets to support SHPS in an attempt to reduce pension contributions and release cash to build affordable houses. However, this is not a realistic option for a SHPS employer. Also consider a weak employer in the USS which can’t afford to continue with Defined Benefit provision, but can’t afford to exit the scheme either, unless USS adopts some of the flexibilities available.These examples highlight a big challenge for multi-employer pension schemes around their effectiveness, including the flexibilities they offer, as increasingly their employers are considering the more radical options available – for example transferring to a more flexible arrangement.
The reality is that where a funded multi-employer scheme is exposed to the covenant of each of its employers, it needs to spend more time managing its employers and giving those employers options. This will increase the cost of running the scheme, but starting from a very low base. For those multi-employer schemes that are not segregated, they should consider enabling its employers to manage their share, otherwise those employers might seek another home.
The new superfunds work because they are operating under a single covenant based on investor capital. This is a model which drives real efficiencies because one-size fits all, but of course superfund entry is not affordable or necessarily desirable for many employers.
In the meantime, multi-employer schemes need to be clear with their employers that the overall cost of their pensions provision has been impossibly cheap and the time has come to move to a more dynamic model. They will still be able to compete on efficiency with the new more modern consolidators if they do this effectively.