Will pension scheme numbers drop to 1,000 schemes in 15 years’ time? And do they really need to?
Few doubt scheme consolidation will continue apace over the coming years. Predictions vary, but some believe the total number of schemes will have fallen by 75% within 15 years.
The arguments for consolidation are nothing new. Most pension schemes are small and suffer from diseconomies of scale. Sitting behind this is a combination of funding shortfalls among many smaller schemes, as well as a desire by companies to offload schemes sooner rather than later.
The regulator is on board, as is the government, both preferring what is being seen as a “market-led” solution.
However, we would question whether it is really so inevitable. While they are undoubtedly beset by issues from all sides, the actual likelihood of either outcome occurring for any one small scheme is much lower than it might appear.
Scheme numbers can only fall if they choose one of two paths: merge, or move to a consolidator. The former is extremely difficult as I don’t think schemes want to build multi-employer schemes. The latter is contingent on whether schemes can afford it
If you take the option to merge with a like-minded scheme first, there are untold layers of complexity around such a decision, including around member benefits and outcomes, scheme dependents and so forth. Finding a match could be far more difficult than schemes looking at this expect, while the appetite for multi-employer schemes to be created instead is unlikely to be very high.
The other option is to turn to consolidators like the superfunds. These can offer the security they need and access to a wider range of institutional investment capabilities.
It is easy to see the appeal of such an option for both corporates having to fund their own pension schemes, as well as members themselves.
However, what has been overlooked here is whether schemes are attractive enough for consolidators from a funding perspective. It would be quite easy for consolidators to simply cherry-pick the most well-funded schemes and leave the rest alone, with the whole thing contingent on whether schemes can afford it. Indeed, the evidence points to the former ringing true, and there is actually a danger that underfunded schemes wrongly assume they will be rescued by consolidators who ultimately might not be interested.
However, all is not lost. There are some changes that other interested parties could take which could have the desired effect of economies of scale (and the benefits this brings) without resorting to consolidation.
For example, if administrators operated by quoting their total scheme size rather than on a scheme by scheme basis, it could cut costs and open up access to better investment choices for all schemes under said administrator’s umbrella.
Meanwhile, if outsourced service providers (and I include asset managers, consultants and actuaries in there as well) have economies of scale then their own fees should maybe start to reflect that.
The point is, if the real goal is to make cost savings for schemes in general and thus help them be better funded, there are other options outside of consolidation which could well come to the fore, and stop this current trend in its tracks.