Until the turn of the millennium, most enterprise companies had their own pension scheme. Even if it wasn’t offering a defined benefit, the scheme was likely to have trustees drawn from the board with representatives nominated by members (often organised through unions).
But the past 20 years has weakened the link between a company’s governance and its pension. This shift has its roots in the 1980s with the introduction of personal pensions. Personal pensions are most notorious as the means with which individuals could transfer out company pension benefits, but they also eroded the trust structure by offering employers the opportunity to pay into pensions where every decision but the contribution rate could be taken by the personal pension provider. Groups of personal pensions acquired a murky status for governance with some companies operating them, choosing to run a governance committee while others purposefully didn’t.
The key driver in the decline of corporate governance over the company/staff pension scheme was a concern that even in a defined contribution scheme, the company could be deemed responsible for the outcomes of the pension. This concern has been fanned by reporting from the US of “Erisa violations”, where employees have sued bosses for the mismanagement of pension plans to make good the resulting reductions in member outcomes.
Since the advent of auto-enrollment and in particular the Government’s establishing Nest, we have seen a new option for employers, keen to disassociate themselves from poor pension outcomes. The master trust or more properly the multi-employer occupational pension scheme offers employers the chance to participate in a trust=based scheme promoting best practice, without the need to have its own trustees. Most importantly participating employers of a master trust can blame an arms length governance body if things go wrong. Nest is largest master trust because it has taken on the task of mopping up the many small employers who would not have a workplace pension but for auto-enrollment.
In summary, the last twenty years have seen a shift in corporate governance that has excluded pensions for future service.
However, the question of the legacy of pensions set up in previous decades remains. What are the options for employers pre-existing pension obligations. The Government has been at pains to legislate for what Guy Opperman, the Pensions Minister, calls a spectrum of employer choice. The colours of the spectrum are characterized by the amount of risk a company is prepared to take with regards future outcomes.
There are now only a handful of pension schemes open for the future accrual of defined benefits (DB). Very few private employers , mainly restricted to those with strong social purpose, continue to offer access to defined benefits for future scheme but those who do include some of the largest schemes, including the University Superannuation Scheme (USS), parts of the railway schemes and most notably the Local Government Pension Schemes.
Below these in risk consumption are defined benefit schemes where employers wishing to keep their DB trusts open, but not for future accrual. Behind these schemes are the bulk of employer DB schemes where the intention is that the employer can rid itself of any ongoing obligation by paying for their scheme to buy-out.
The Government is encouraging the contraction in then number of defined benefit schemes through a new funding code which promotes “scheme self-sufficiency”, where the employer is in a position to walk away. This is proving controversial as it is very expensive to employers to achieve this.
To broaden the “spectrum of choice”, Government has widened the range of organisation that can buy-out pensions beyond insurance companies. A new kind of superfund has been permitted which does not have to us insurance to secure the liabilities but can be run as an ongoing DB occupational pension scheme. This is likely to prove attractive to employers so long as they are released from any obligation if the superfund itself goes wrong.
The Government are also talking of a new kind of pension on the spectrum, this is popularly known as CDC and is a collective defined contribution scheme that pays its own pensions but pensions based on the performance of the collective schemes, not on guarantees from the employer. This has the capacity to be set up on a multi-employer basis and targets employers looking to provide staff with a wage in retirement at fixed cost
As for the defined contribution occupational scheme, the trend towards off-loading responsibility for governance and outcomes continues. The creation of the master trust authorization framework by TPR has made the case for offloading governance more compelling.
While there will always be a hardcore of employers keen to keep their own company pension scheme, they are likely to be the exceptions to the rule. In pensions as in war, God is on the side of the big battalions.