Trustee board mergers: When do they add value?

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The UK trustee boards of global cement maker LafargeHolcim have merged after a review by the parent company concluded this would improve governance and save adviser costs. How do you make a board merger a smooth process that adds value? 
 
Trustee board mergers are one of the tools sometimes employed by large groups with several underlying companies or legacy pension funds. Lloyds Banking Group even had two trustee board mergers to bring its four largest schemes under a single trustee. Corporate activity is often the driving force behind these board mergers, although sometimes firms choose to combine the pension funds as well, as Sainsbury’s decided to do after acquiring the Home Retail Group. 
 
The trustees of the £3.8bn Lafarge UK Pension Plan agreed to the scheme sponsor’s proposal to merge the boards after discussions with their advisers and with the company, and assumed responsibility for the trusteeship of the £620m Aggregate Industries Pension Plan in September 2020. 
 
Both funds are now under the governance of one combined trustee board, including the nine existing directors of the Lafarge UK scheme with two trustees added from the AIPP board, making a total of 11 trustees. 
 
“Aggregate Industries UK Limited and LafargeHolcim... had conducted a review of the governance of the two pension plans and proposed having one combined trustee board, with one set of advisers, governing both plans, as it was felt this would further enhance the governance of both plans and achieve savings in the costs of advice,” said trustee chair Roger Mountford in a member update. He stressed that each scheme remains “completely distinct”, having its own trust deed and rules, as well as separate valuations. The Lafarge scheme, which was 104.7% funded in June last year, has 24,000 members; the Aggregate Industries scheme has 5,000. 
 

Combined boards work best where schemes share characteristics 

 
In the last few years merging trustee boards to oversee more than one scheme has become an increasingly popular option to consider, said head of governance consulting at Hymans Robertson, Laura Andrikopoulos. 
 
This ‘consolidation’ option can bring some of the benefits of a sectionalised merger without the cost of actually creating one such merged scheme, she said, but emphasised: “The key to success however is in efficient governance – this needs to be disciplined to ensure that meetings for the merged board are planned optimally and that each separate pension scheme gets sufficient bespoke attention.” 
 
She said issues such as training and topical issues, and often covenant “can clearly be shared over several schemes”, but things like the features of each investment strategy or funding position will often need separate consideration even if there is some overlap.  
 
Board mergers work best where the scheme share the same or similar covenant and funding level and are at a comparable stage of derisking, she noted. 
 
“A merged board is often the first step to consolidating advisers and aligning investment strategies. It is much easier to achieve efficiency if one actuary is advising on two funding positions for example, or one investment consultant is aligning two strategies,” she said.  
 

Trustees are not always happy to be merged away 

 
Trustees are not always as easily convinced as mergers normally mean slimming down the existing boards. This means getting their agreement to a merged trustee board can be a challenge.  
 
It helps to build consensus with both trustee boards from day one, said Andrikopoulos, and to take into account natural attrition where trustee terms are coming to an end.  
 
“Planning the transition over a reasonable period can help adjustment to the new arrangement, and as an interim step a common trustee might be introduced to the two boards so that the two schemes begin to travel in similar directions prior to the fully merged board,” she advised. 
 

DC section moves to master trust 

 
The Lafarge UK scheme trustees do not appear to have a problem with transferring responsibility – in October 2020, they moved the defined contribution scheme to the Aon Master Trust after “an extensive review of the governance of the DC section, in particular looking at how to improve the communication materials and range of retirement options available to members, as well as ensuring that the costs of the investment funds available were reasonable”.  
 
The scheme’s DC membership has decreased to under 2,500 and would have continued to reduce further, the trustee chair noted, highlighting the requirement for trustees of smaller DC schemes to consider whether they are able to offer value for members or if this would be better achieved in a larger scheme. 
 
A review was carried out and the company decided that the plan’s DC section should be moved to a master trust.  
 
“The economies of scale that can be achieved by a master trust can provide better value to our members and meet the ever-increasing regulatory demands for consistently high standards of governance,” Mountford said. 
 

Are many employers looking at rationalising scheme governance at the moment?