Why the consolidation of small DB pension schemes could lead to millions being retained to invest in UK businesses
The benefits of consolidating the 4000 plus smaller defined benefit pension schemes in the UK has been debated widely. The reasons most commonly cited for consolidation include schemes being run more efficiently, an improvement in governance, better economies of scale, and more secure outcomes for members. However, in our view there is another, often overlooked, argument for bringing together groups of these small schemes to run as one. That is the fact that consolidation could have wider reaching financial benefits, leading to around £100m of investment being retained for investment by UK businesses over the next 20 years.
The reason for this stems primarily from the cost of running these types of pension schemes, and the complexities involved. Research from the Pensions Regulator suggests that a typical sponsor of a small defined benefit pension scheme could be paying around £1,200 per member per year currently to run the scheme, with many of these members no longer being employed by the sponsor. If a scheme has 50 members, this could mount up to around £1.2m over a 20-year period, which is a typical timeframe for the scheme to exist.
The good news, however, is that these costs are far higher than any of the new consolidator options typically require, and so there is an opportunity to redirect some of that money back to UK business.
Through consolidation, running costs could be reduced to as little as £200 per member per year – the level currently enjoyed by larger schemes. Over 20 years, the cost per member could therefore reduce to just £200k, creating a saving of £1m for the sponsoring company’s business.
Looking wider, if just 100 of the 4,000+ small schemes move to a consolidator and reduce their costs, we could see around £100m retained and invested in UK businesses, instead of being used to pay for the costs of running the pension scheme. If we then consider the multiplier effect of investment in a business, the money actually generated for the business could be far higher.
Increased investment for these sponsoring companies also means that a business is more stable and financially secure, which is key at a time when companies are grappling with the many new realities arising from the pandemic, Brexit and inflationary pressures. By focusing on controlling long-term costs, this money could result in more stable businesses better positioned to thrive and grow.
Stoneport itself only has capacity for around 100 schemes to join, and we can really help these smaller schemes reduce their running costs significantly.
Those employers who are smart and focused on reducing their defined benefit pensions costs will realise additional benefits reaching further than the pension scheme itself. And these benefits can reach existing employees, as well as the members of the old defined benefit scheme.
To find out more about Stoneport and how it could help your business please contact us at firstname.lastname@example.org