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Companies with multiple DB schemes often look for efficiencies through a pension scheme merger, but it is not always cost savings that end up being the main advantage.
Employers where one scheme is very large and there are one or more small schemes are prime candidates for mergers; Thomas Cook was planning to merge its three small schemes into the main pension plan, for example. In the public sector, the Lothian Pension Fund absorbed the Buses scheme earlier this year; and the government has been consulting on merging a local transport scheme into the West Midlands Pension Fund.
Former pensions minister Baroness Ros Altmann has previously emphasised the benefits of merging DB schemes. Altmann says merging small schemes and joining small with larger schemes “could have tremendous benefits for cost reduction and investment enhancements”.
She points out that costs per member for small schemes are greater and that smaller schemes are limited in how they can invest. “The big problems are around benefit alignment and the huge complexity of different scheme rules,” she notes.
Differences in funding are another major stumbling block. A full merger requires members to be no worse off afterwards than they were before, which often implies that the less well funded scheme needs to be brought to the level of the better funded scheme.
Emotive debates among transferring trustees
“If you’re an underfunded scheme it’s quite an easy analysis for a trustee,” says senior trustee executive Vassos Vassou from Dalriada Trustees, while for a trustee of a well funded scheme, “it’s more of a fine balance”.
But a merger is still possible in that scenario. Vassou recalls a case of a scheme in surplus that took on a slightly underfunded scheme but where the trustees negotiated other securities from the company instead.
But negotiations are not always straightforward. Vassou says trustees can be emotive and “quite possessive” over their schemes, particularly if they are better funded. “The arguments I’ve seen is, they’ve managed the scheme very well and the other trustees haven’t, why should their good work be shared with somebody else,” he says.
For Vassou, the achievements of a particular board are however beside the point if members are not worse off than they would be otherwise. “If other members are more likely to get their benefits and it’s not really impacting your members, there is a social good” as well, he adds.
But sensitivities among existing trustees mean any merged trustee board has to be carefully put together, with both or all of the merged schemes represented.
Before any merger, there are often worries about whether any of the transferring trustees will serve on the receiving board, agrees Jonathan Sharp, a partner in law firm Baker McKenzie. Trusting a new set of trustees can be difficult for existing boards.
"The transferring trustees can be quite suspicious of receiving trustees,” wondering whether they will look after 'their’ members as well, he says. Personal dynamics can also mean that where trustees do start to work together, it takes time for the boards to integrate.
Improved governance seen as key benefit
But governance efficiencies such as having a single trustee board are often a key driver for a merger – perhaps even more so than the often-cited cost savings, says Sharp.
“It’s normally sold on cost savings, but I’ve seen mergers where actually there aren’t always cost savings anticipated,” he notes. Companies tend to want to save management time by interacting with just one board and, where employees are on the board, giving staff time off for their trustee duties.
Alignment between the scheme and employer is also a consideration. Sharp says in other cases, a scheme merger can be part of a company strategy to form a single identity, avoiding employees still considering themselves part of a firm that was bought.
While they can result in cost savings, governance efficiencies have other benefits; a smaller scheme might profit from the advisers, investment knowledge and extra attention its larger sister scheme has access to, for example, even where schemes remain sectionalised after a merger.
Where schemes are merged into a trust but remain in separate sections, they still have to carry out separate valuations; but they can carry them out at the same time and perhaps negotiate a lower rate with the actuaries.
Merging administration, the trustee board or the scheme in sections are all ways to create efficiencies without pension funds undergoing a full merger, but they can be steps on the way there, says Sharp.
“A company might say, ‘We just have this one trustee board’. And later on, they might say, ‘Actually let’s do the full merger’,” he explains; the same can be true for sectionalised mergers.
This can be strategic; the company might have approached the original trustee boards for a scheme merger and found that one board is resistant to a merger, deciding to merge the boards first, “so sometimes it can be broken down into stages”, according to Sharp.
Has your scheme gone through a merger or are you considering one? What has been your experience?