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Pension Funds Warned: Merge or Lose Out

A City taskforce seeking to eliminate risks in Britain’s defined benefit pensions has warned of considerable risks and recommended mass consolidation.

  • Joe McGrath

Around three million members of U.K. defined benefit schemes have only a 50 percent chance of receiving their full benefits in retirement unless pension schemes make big changes that include consolidation, according to research published Wednesday.

The Pensions & Lifetime Savings Association, a trade group representing British pension schemes with assets totaling £2 trillion ($2.7 trillion), warned that millions of people were at risk of losing pension benefits unless pension schemes consider consolidating into so-called superfunds, which would absorb and replace existing schemes. The warning was issued in the PLSA’s long-anticipated Defined Benefit Taskforce report.

The group said British defined benefit schemes could pool their collective £1.5 trillion of assets, currently distributed amongst nearly 5,800 schemes, into larger superfunds to improve funding levels and obtain better deals, according to the report.

The PLSA estimates that by opting for shared services, asset pooling, and one single governance structure, schemes could save a total of £1.2 billion every year. Still, the report stressed that this alone would not be sufficient to make up the £400 billion shortfall in defined benefit funding.

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In a statement accompanying the report, Ashok Gupta, chair of the PLSA Defined Benefit Taskforce, said up to 11 million people could have their DB retirement incomes threatened by “more high-profile company failures” unless schemes impose changes to make them less dependent on employers.

“Our proposals have the potential to transform the industry — helping to ensure more members get their full benefits, reducing sector inefficiency, addressing the issue of stressed schemes and enabling sponsors to concentrate on growing their businesses,” he said. “The industry and government need to grasp this opportunity and tackle serious flaws that threaten the security of people’s retirement.”

Gupta cited collapsed retailer BHS and steelmaker Tata Steel as evidence that DB scheme members are vulnerable to losing benefits when employers fall on hard times. Wednesday’s report follows warnings from the PLSA and the U.K.’s Pensions Regulator about inadequate governance standards at some small schemes, while larger schemes were the focus of a report in August by employee benefits consultant JLT, which concluded that the total pensions deficits of FTSE 100 DB schemes grew by £17 billion in 2016.

Former pensions minister Steve Webb, now a director insurer Royal London, said today’s PLSA report findings should be taken “very seriously” by policymakers.

“The report highlights the fact that millions of savers have only a fifty-fifty chance of having their pensions paid in full by their company pension scheme,” he said. “High-profile cases such as BHS and Tata Steel are only the tip of the iceberg, and the government needs to be more proactive to reduce the risk of more scheme members not getting their full pensions.”

Webb added that if a way is found to implement the proposals that suits all schemes, it could “provide better value for money, reduced pressure on employers and an increased chance of pensions being paid.”