There are thousands of small pensions vehicles trying to get to the end of their funding journeys…often in a very inefficient manner. Find out how operational consolidation can help.
In the 1960s the British government decided that cars were the future of transport, so they built roads and closed railways. We now have millions of small, inefficient vehicles carrying just one or two people, often all trying to get to the same place at the same time.
At a similar time, governments and the pensions industry were encouraging British businesses to set up their own defined benefit pension schemes. And now, we have thousands of (often small) pensions vehicles trying to get to the end of their funding journeys…in a similarly inefficient manner.
This 6,000-strong fleet of pension schemes today has a combined deficit of over £500 billion, driven by a perfect storm of low yields, increasing longevity and growing regulatory burden.
There is no silver bullet to fix the deficit problem. But there is a route to complete the journey more efficiently (whether the end destination be insurance, self-sufficiency or superfund). That route is operational consolidation.
Almost any form of bundling services or outsourcing can deliver operational efficiencies. But typically, operational consolidation can involve one or more of the following four options:
There are two main reasons why operational consolidation might be a good idea. First, both advisor costs and investment fees can be significantly reduced through the economies of running a number of schemes collectively.
Secondly, certain vehicles can provide the infrastructure for a much improved governance model, offering both real-time information to stakeholders and real-time governance to react to this information.
These factors have the potential to make a large dent in journey plan times and significantly improve the chances of reaching a scheme’s funding target (buy-out or otherwise).
Typically under these arrangements, the existing trustees are replaced by a sole professional trustee. The scheme can preserve its own trust status (under a platform approach) or is wound-up and transferred into a larger scheme (under a master trust).
All advice is delivered to the new sole trustee responsible for all the schemes in the arrangement. Common issues need only be discussed once and can be implemented across all affected schemes. Typically advice is continuous and not restricted to a meeting date cycle.
Technology allows advice to be delivered cost-efficiently. For example, it is possible to use online models to perform actuarial valuations, investigate assumptions, adapt investment strategy etc. This can be discussed and agreed in one meeting without paperwork and at a low cost.
Assets are separately identifiable for each scheme but are consolidated for “bulk buying” with fund managers providing further cost savings and the potential to access more sophisticated investment opportunities.
At KPMG we have developed the Enplan Pensions Platform in alliance with Entrust Pension Limited (a long-established firm of professional trustees). Our aim has been to capture the best features of operational consolidation.
Existing schemes don’t need to be wound up or change their legal structure. Rather, they appoint Entrust as trustee and then all key services are provided through a common platform developed by KPMG.
The Enplan Pensions Platform offers a number of advantages, currently utilised by 29 schemes already on the platform, including:
Since launching in 2016, the platform is now supporting schemes with combined assets of £500 million, on their pensions journey. If you would like to explore whether the Enplan Pension Platform could benefit your Scheme, please email Laura Amin Senior Manager for Pensions at KPMG in the UK.