Punter Southall revives multi-employer concept in consolidator
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As consolidation offers multiply in the defined benefit market and superfunds wait for their first transactions, Punter Southall is proposing a revival of the multi-employer concept for smaller schemes, which could bring their sponsors savings of 80 per cent.
Stoneport, a consolidation vehicle for DB schemes in the UK with fewer than 1,000 members, was launched on Tuesday with the goal of targeting running cost, investment management and end-game efficiencies, as well as improving governance standards for these schemes.
In its initial phase, the consolidation vehicle will be set up as a DB master trust, taking on board the different schemes. Once scale is achieved — it aims for 100 pension funds by the end of 2022 — the “walls will collapse” and it will become a multi-employer scheme, explained Richard Jones, chief executive at Stoneport.
He told Pensions Expert: “Instead of doing 100 valuations, we do one; rather than doing 100 service accounts, we do one; rather than having 100 trustee meetings, we only have one.
“That is transformational to the cost base, it takes it from 20 per cent [in savings at a master trust] to 80 per cent.”
According to calculations from Punter Southall using real examples, a scheme with 50 members would have a running cost saving over Stoneport’s lifetime of £1.3m, while a pension fund with 627 members would save £9.1m.
This is due to the fact that along with increased legislative pressures and a lack of scale to run efficiently, small schemes end up shouldering running costs of more than £1,000 a member each year, which compares to less than £100 for the largest schemes.
The end goal is for the scheme to go to buy-out by 2045.
Punter Southall’s own DB scheme is the first to join the new consolidator, which has actuarial, administration and investment advisory services provided by Barnett Waddingham.
The risks of a multi-employer scheme
With multi-employer pension schemes besieged by issues with section 75 debt in the past few years — such as the Plumbing and Mechanical Services Industry Pension Scheme’s long-running debacle that is threatening to bankrupt plumbers — Stoneport will have a series of protections for employers built into the system, said Mr Jones.
Section 75 of the Pensions Act 1995 refers to the debt payable by an employer that ceases to participate in a DB scheme. The debt reflects the cost of buying out an employer’s portion of scheme liabilities.
In multi-employer DB schemes, this debt is supposed to stop sponsors from walking away from underfunded pensioner promises. But with the end of active membership triggering the debt, the legislation has left some employers unable to tackle their mounting pensions problem, and in extreme cases left a ‘last man standing’ responsible for the liabilities of an entire scheme.
“As we put our own scheme in here, and we are one of the [sponsoring] employers, we are very keen” on having safety measures, Mr Jones noted.
He explained that all employers will have to pass a covenant test when entering Stoneport. “We will test if they can provide suitable support for the liabilities they are transferring in — with some headroom, they need to be able to take some downside risk on their liabilities — and that probably takes out a quarter of the market.”
The test will be repeated prior to the collapse of the master trust into a multi-employer scheme, “just to make sure the sponsors are still good for the money”, Mr Jones added.
He also noted that the multi-employer scheme will only be created if the pool is suitable as a whole, and every employer will have a saying in one-man-one-vote system prior to the event.
“It’s a common structure, we’re just using it in an innovative way,” Mr Jones argued.
If Stoneport does not achieve its goal of having sufficient schemes on board to create a new scheme, the participant pension funds will stay in the initial structure.
“We have a fee agreement with Barnett Waddingham to get schemes a 25 per cent discount if we get stuck in the master trust phase forever. You will never be worse off than in a DB master trust,” he added.
With a business model that will see Punter Southall receiving 25 per cent of the running cost savings actually achieved by employers — excluding levy savings and investment management cost savings — the company will only “recoup its investment in the event that very significant running cost reductions are delivered to the employers who join Stoneport”, Mr Jones said.
New consolidation guidance for trustees
Punter Southall’s new offer is the latest innovation in this market, with the two announced consolidators — The Pension SuperFund and Clara Pensions — currently operating under an interim regime, awaiting final approval from the Pensions Regulator.
Richard Williams, director of policy and communications at Clara Pensions, welcomed the launch of Stoneport, noting that “new models are a strong vote for the value of consolidation”.
He said: “Different models, with different levels of security and different opportunities for sponsors and trustees, will be of value to different circumstances in the pensions universe.
“In our case, we think removing the risk of employer insolvency is the right option, as alongside our bridge-to-buyout model, it gives a more secure journey to buyout. That’s why we’ve built Clara the way we have, but clearly as consolidation becomes a more popular idea there are going to be divisions like this between the different solutions created.”
Further steps are being taken in the development of superfunds, which sever the link with the sponsoring employer. David Fairs, TPR’s executive director for regulatory policy, analysis and advice, promised expanded guidance for trustees on the watchdog’s expectations when considering this type of consolidation vehicle, to be published this week.
Speaking at the PLSA Annual Conference 2020, Mr Fairs noted that the new guidance “will set out our expectations of the things that trustees need to take account of and the extent to which they can rely on the due diligence that we have carried out through the assessment process, so that they can know exactly what they need to take into account”.