There are a range of CDC alternatives for a small DB scheme to be replaced by

Pensions Oldie is annoyed with my commentator – I do not know who the commentator is.  It does not matter, what matters is what Oldie says, he is holding out for the small DB pension scheme and for once I don’t agree with him/her.

I totally disagree with your correspondent’s premise that the run on of small schemes is scandalous.

The vast majority of small schemes are associated with small employers. Should small employers not be given the same flexibility to decide on the future of their scheme as larger employers? Should small employers not be able to obtain the benefits of the investment returns available on the assets in the pension scheme?

I quite agree here that employers who want control of how the pension is managed should have the capacity to influence the trustees, the risk taken and the benefits arising. This can be done more easily with a multi-employer CDC where the proprietor is either owned or partially owned by employers. I do not think that the DB  master trust approach has worked very well because of the lack of flexibility in the payment that can be paid.

For many small employers, the short term cash commitments to bring the pension scheme assets up to buy-out levels would (as for 000s of others during the past 20 years) place an intolerable strain and lead to the demise of the employer, affecting its current as well as past employers and also damaging the local and UK economy.

The solvency level required of any DC scheme was absurdly high when the means of achieving it was not achievable through investment, only by extortion on the sponsor by the trustees (aided and abetted by TPR). But had the flexibility of a pension in payment (one that cold go up or (rarely) down), then extra contributions would not need to increase.

For others in so called “surplus” should not the employer be able to benefit from the investment returns on the scheme assets, in the knowledge that they can be re-invested in the employer either through a refund or more efficiently by funding continuing DB accrual and thereby reducing its future employment costs compared to competitors constrained by DC contributions.

I agree that CDC does not have the option of a contribution holiday, but just as the need  to decrease pensions is rare, so the point when a scheme genuinely has too much money is equally rare. For the most part, the smoothing of missing or exceeding targets is over time and will not cause problems to the contribution rate!

I think it is rich for the insurance broker mindset to say that small employers should buy their over-priced insurance policies when the risk to the smaller employer is that a handful of former employees might live for slightly longer than expected and outstrip the growth in the pension scheme assets as actually invested, and not as assumed in a valuation.

I cannot think of any other circumstance where an employer would be sorry to hear that a pensioner was still alive. If they were fortunate to have pensioners living longer than anticipated, so be it. It is a happy problem that will be dealt with if and when it arises. I think we must live with some problems!

The real killer for the small DB schemes are the administration costs forced on them by an over-burdened regulatory regime and pension consultants over-selling their services, including so called “risk transfer”!

Here I am totally with you. The problem is the poor VFM from pension administration and having worked in a DB orientated pension consultancy for 10 years, I can but apologise.

This excellent blog from Punter Southall breaks down the costs that small DB funds face and asks whether there is a hope of bringing down the costs.

The article concludes

Defined benefit pension schemes are expensive to run and are only getting more costly, despite being largely legacy arrangements with significantly improved funding positions. Accounting standards aim to clarify costs but inconsistent application and exclusion of key expenses mean the picture remains unclear. With the rapid rise of consultancy fees and VAT rules evolving, sponsors should be carrying out an honest review of what their scheme truly costs and ensure this is accurately reflected in their accounting disclosures.

The failure of administrators and investment managers to work efficiently is surely an argument for superfunds and not for many separate small funds.