Convince or collapse – the options for small DB schemes in the next decade.


two ugly.jpeg


We stand on the cusp of the third decade of the 21st century. That decade is likely to see small DB schemes collapse into consolidators or stand firm with renewed conviction. I wonder if I will still be writing blogs in the summer of 2029 to review this statement, I suspect that most current trustees of DB plans will not be around to read them – if I am.

Yesterday I paid my first visit to Vestry House in Laurence Poutney Hill, the offices of Disruptive Capital and its nascent Pension SuperFund. Whether this DB consolidator succeeds or fails is itself a matter of conviction, it looks as if Edmund Truell has dug in his heels and it will be hard to dislodge him. But if he fails, there are others – such as Laurence Churchill’s Clara, that will step up to the plate.

The Treasury are giving support to the insurers who fall under their regulation (FCA and PRA).

The DWP have decided that consolidation will happen their way and though the Pensions Regulator is dragging its feet, the pensions industry generally expect the non-insured consolidators to get licensed by the end of this year

Two ugly sisters

TPR has adopted an attitude of tending small schemes through a fast track process which is the pensions equivalent of the Liverpool care pathway. A gentle decline into insurance – “go gently into that good night”. This is not pleasing the consolidators who wish they’d listen to their paymasters at the DWP.

Insurance companies have lobbied hard against the DB consolidators, claiming they are simply exploiting loopholes in regulation to underwrite buy-outs without the requirements of Solvency II. They have the Treasury’s support.

In the face of considerable opposition, the Pensions Superfund has hit back with a report commissioned from Redington proving against a number of (to me) incomprehensible measures, that the asset allocation of consolidators (modelled on the PPF) provides better outcomes in all weathers than those of insurance lifeboat funds.

This is not a fight that I want to get into, not least because of the twitter storm going on after I pointed out the availability of life annuities in the Times. Redington’s analytics have always been suffeciently arcane to prove any point, insurers are hardly charities;- who is there to love?

Insurers and consolidators are the two ugly sisters. They will be going to the ball long after Cinders has had her pumpkin night out.

Faith in small schemes waivers

Small DB schemes have to face a harsh choice. Either they go back to their sponsors and members and argue for their continued existence – with conviction- or they collapse into consolidators. I don’t see the Liverpool pathway as much of an option – though it will keep diverse pension administrators, accountants, lawyers, fund salesmen, platforms and most of all professional trustees in a job at least till the summer of 2029.

But the job of the employers who sponsor these schemes is not to act as surrogates to the Ugly Sisters, but to produce things, or do charitable things or to provide services and the cashflow calls of the pension schemes are unsustainable, the blight on business strategy unmanageable, the impact on productivity dismal.

We can’t let small DB schemes blight corporate and charitable strategy, these schemes must either shape up or shape out. This is not Edmund Truell talking – it’s me – and I work for an actuarial consultancy that is supported by small schemes.

The residual value of small schemes

Small DB schemes can and do add value to companies, but not when they put themselves on the pathway, then they only act as a succubus.

My point is illustrated by this graph – devised by my friend Derek Benstead so that even I could explain the value of keeping a pension scheme open

life cycle open

There is no great benefit in closing your own scheme, you might as well collapse it into whatever the ugly sisters are offering. You’ll pay a price for off-loading it, but it’s far from clear to me that insurance companies are worth the extra price that solvency II creates, they are the non-profit option and at the non-insured consolidators are holding out some hope of with-profits increments if they are proved right.

Your choice as a Trustee is probably dictated by the pockets of your sponsors, they will in the next ten years be looking at what the ugly sisters have to offer and they will ultimately be making the call.

The value of small schemes is int the conviction of their trustees and the aspiration they can create with sponsors. I can’t see schemes re-opening, I can see schemes resisting closure and I see those schemes that struggle on doing so on a radically more effecient basis.

The proper management of open schemes will increasingly involve modern systems of record keeping – the adoption of digital communication with members, low cost asset management using platforms to drive down costs and e-payment of pensioners.  Trustees who do not employ efficiencies available through new technologies will perish.

The value of small schemes lies in their capacity to adapt to tomorrow’s world, while preserving yesterday’s promises.

How many DB schemes will survive?

I doubt that more than 1000 of the 7000 remaining DB schemes in this country will be around for me to blog about in 10 years time.

I believe that consolidators and insurers – the two ugly sisters of the pensions world, will convince sponsors who remain unconvinced by their schemes, to pack it in. The ongoing costs of keeping schemes open will ensure this is the case. The PPF will remain the lifeboat – the third ugly sister – though she waits in the wings.

This is a harsh prediction and I hope I am proved wrong. The prediction is a challenge for trustees (especially independent trustees). It is also a challenge for consultancies and other professional firms.

We are approaching the third decade of the 21st century and it is a decade that makes or breaks DB schemes. The ugly sisters have already arrived at the ball, will Cinders?



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Convince or collapse – the options for small DB schemes in the next decade.

  1. Kevin Wesbroom says:

    Nice one Henry – and well done for recommending an annuity! The small scheme debate is an Irish problem – I wouldn’t start from here. There is no reason why we would have 7,000 or 6,000 or 5,000 separate schemes. But we do. So how best to see them politely shuffle off their mortal coil? The one thing I have found interesting about the Regulator’s discussion – “The Future of Trusteeship and Governance” which specially talks about having fewer but better governed schemes in the market – is that for DB scheme consolidation they only talk about Superfunds. Nothing at all about DB Mastertrusts – which would be massively easier for the Regulator to govern, unlike Superfunds which may well have some very sophisticated (I did not say sharp) operators backing them. DB master trusts seem an obvious way to go – so why is the Regulator not keen??

    • henry tapper says:

      It is odd- commercial model? Consolidators get paid from assets and give employers relief MTs demand fees and give employers grief. I may go into advertising

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