Small DB or Large DB? That is the question!

The debate on whether there is a crisis for DB pension schemes has shifted focus. The industry is now discussing the need for consolidation of DB schemes and the merits of superfunds to ensure that members receive the full benefits they are expecting.

Last month, the DB Taskforce of the Pensions and Lifetime Savings Association (PLSA) published its final report, focusing on the key issues of underfunding, covenant risk and lack of scale. Its key points for these issues are:

Most of the UK’s 6,000 DB schemes are underfunded and the significant deficit reduction contributions (DRCs) do not seem to be making much of an impact.
Most schemes in deficit will reach a sustainable funding position if they can rely on financial support from the sponsoring employer over the long term.
Larger schemes usually have more access to sophisticated investment skills and governance expertise and can negotiate lower fees.

The report recognises that one solution does not fit all schemes and so investigates a range of potential options to help schemes improve their performance and increase the probability of members seeing their benefits paid in full. However, the PLSA is very keen on DB consolidation. For schemes with strong employer covenants, to achieve better value for money and improved governance. And for schemes with weaker sponsoring employers, “turning the covenant into a cash payment” that will increase the likelihood of members receiving full benefits. Easier said than done!

The PLSA’s promotion of consolidation may be driven in part by their lack of representation with the schemes with fewer than 1,000 members. For its own longevity as an industry body, the PLSA would be keen to be seen to speak for another 3 million members.

TDC is firmly against the concept of consolidation of small schemes. Well, we would say that, wouldn’t we. Making it easy for trustees and employers to manage their small DB schemes is what we are all about. It’s in our DNA.

We are against consolidation as being currently proposed because it is a costly option that is not required for most small schemes. Small DB schemes can be governed well, receive cost effective services and implement appropriate investment strategies. The majority of TDC’s clients are evidence of this.

In future blogs I will look at each of these three issues in more detail – governance, costs and investments, and provide a definitive answer to the question, Small DB or Large DB?