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Article | Pensions Briefing

Pension scheme consolidation – lessons from overseas

What can the UK learn from other countries?

Pensions Corporate Consulting|Defined Contribution|Retirement

By Peter Routledge and Shriti Jadav | August 15, 2017

Peter Routledge and Shriti Jadav discuss scheme consolidation and lessons that can be learnt from other countries.

Last month, Richard Nicholas discussed pension scheme consolidation as an effective way to improve efficiency, manage costs and enhance member outcomes. As the UK begins to consider scheme consolidation and how to make this happen, Peter Routledge and Shriti Jadav look at what can be learned from other countries. In this article, we focus on Australia and the Netherlands, where consolidation has been extensive, and contrast with the US and the UK, where it has been less common so far.


Figure 1. Australia: Corporate defined benefit plans have all but disappeared.
Scheme consolidation - Lessons from Australia

Australia can be considered an "early adopter" of consolidation.

In the 1970s, many small businesses in Australia used master trusts as a pooled pension saving vehicle. In contrast, in the UK, although master trusts have been around for a while, we have only recently started thinking about them as a vehicle for scheme consolidation.

In the 1980s, compulsory retirement saving was introduced in Australia. This precipitated a switch from defined benefit (DB) to defined contribution (DC) pension plans. At this time, pension plans stopped being tax-regulated savings and became regulated financial service providers – this was onerous for companies and acted as a trigger for many companies to consider settlement as they became less keen on sponsoring pension plans.

In the early 1990s, schemes were able to settle their liabilities on relatively cheap terms (as bond yields were high). It was also a time of significant consolidation into master trusts – it was possible to convert from DB to DC quite easily, or to convert DB benefits into something equivalent, which meant that moving to a relatively small number of benefit sections per master trust was possible.

By the early 2000s, pension plans were nearly all DC, with most funds rolled into a master trust or industry fund.

The Netherlands

Figure 2. The Netherlands: Major consolidation in the last decade
Scheme consolidation - Lessons from Netherlands

The key feature in the Netherlands has been regulator activity - the regulator has been active in writing to pension funds that have remained out of consolidation vehicles, noting that the fund may be too small to fulfil the governance requirements for running a pension fund. Every company that received such a letter decided to consolidate. The alternative, if they chose not to, could result in a lot of investigation activity by the regulator. The implied threat worked, and the result of this was a significant shift in the amount of consolidation in the Netherlands.

The Netherlands also have ‘soft accrued benefits’, that is, members can switch from one type of past service benefit to another as long as they are equivalent – this clearly helps to harmonise past service benefits. Another feature of the Netherlands market, which makes it different from the UK is that while it is called a DB market, from a company perspective it is broadly a defined contribution that is paid into the plan and it is the members' benefits that will change if there is adverse experience. There are also regulations that allow for conditional indexation and changes to accrual, making the Netherlands market more like a DC market than a DB market.

Consolidation in the Netherlands has generally been into industry funds rather than master trusts, and they are some way along the way towards 'superfunds'. Some new legislation has recently been implemented introducing a vehicle similar to master trusts,  where employers have their own discrete section and again, the government is looking to encourage consolidation amongst those 290 schemes that still have not consolidated.

United States

Figure 3. US: Little movement to consolidation
Scheme consolidation - Lessons from USA

In the US, many DB plans remain open, which reflects that DB plans in the US typically have a much lower value of benefit provision – and therefore a much lower cost to the sponsoring company – than the average UK DB plan. In addition, US employees typically have a 401k (DC) plan. At the moment, this looks like a sustainable system.

There are some potential means of consolidating – the US has multi-plans which are similar to master trusts, and also industry wide plans that can be used as a vehicle for consolidation.

There may be a tipping point in the US around pension accounting. At the moment, for a typical US company, the DB plan has a positive impact in their accounts. They are allowed to take credit for expected returns on their investments in the pension plan, which is different to the UK and the rest of Europe, where the expected return is set to be in line with the discount rate assumption used to value the liabilities. If accounting standards change in the US so that pension plans became a burden on the company's accounts, perhaps we might then begin to see consolidation. But for now, the US is fairly stable.

United Kingdom

Figure 4. UK: Reduction in the number of DB pension schemes
Scheme consolidation - Lessons from United Kingdom

In the UK, the reduction in the number of DB pension schemes over the last 10 years has been largely due to schemes going into the Pension Protection Fund due to the insolvency of their sponsoring employer and from the merger of multiple schemes operated by a single company.

If we look at the countries where there has been significant consolidation of pension schemes to date, the factors that have been present include:

  • A move to DC provision for future service
  • The ability to convert or simplify past service benefits
  • The regulator playing an active role in the market.

We are seeing growing evidence in the UK of consolidation through companies merging their own schemes, master trusts growing in popularity and the rise of fiduciary management (see last month’s article: Pension scheme consolidation for more),  and our expectation is that this will continue. However, the consolidation of pension schemes could accelerate quickly if new legislation is introduced or if the regulator were to play a more active role in supporting consolidation.

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