UK motor resale company Lookers has amalgamated two of its defined benefit pension schemes, as experts highlight the improved efficiency and cost savings associated with mergers.
Many companies have several legacy pension funds due to past corporate activity. Some look to combine schemes where possible, in a bid to boost governance and reduce costs.
An employer is going to be more keen to do it on a non-segregated basis, where everything’s just mingled in together
Nigel Cayless, Sackers
Recent examples include Coats’ proposed merger of its three UK DB schemes, and Sainsbury's, which revealed plans earlier this year to combine its two DB funds to save money.
Lookers has also made a move to merge. “During the year, the majority of the assets and liabilities of the Dutton Forshaw Group Pension Plan were transferred to the Lookers Pension Plan,” states the company’s 2017 annual report.
The report adds that some assets have been retained in the Dutton Forshaw Group Pension Plan “to cover liabilities that remain with the scheme as well as the costs of closing the scheme”.
In 2016, the £106.5 Dutton Forshaw scheme had a deficit of £38.5m, while the £104m Lookers scheme had a £39.9m deficit. After the merger, the Lookers scheme, which had £218m in assets in 2017, has a deficit of £65.5m.
Lookers also operates a third DB scheme, brought onto its balance sheet after the acquisition of Benfield in 2015, but this plan has a relatively small deficit of £0.4m as at 2017, and it has not been merged. All three schemes are closed to entry for new members and closed to future accrual.
Bringing schemes together boosts efficiency
Martin Hunter, principal at XPS Pensions Group, said a scheme merger “can be very attractive, certainly from an employer perspective”.
“If you can put them all into one, it’s only one set of negotiations, one set of trustees,” he said. The employer also no longer has to worry about making sure it is treating its several pension schemes fairly.
However, while it may be desirable for employers to consolidate, there can be several issues for the trustees to consider.
If one scheme is well funded and another is badly funded with a big deficit, the trustees of the well-funded scheme may be reluctant to combine the schemes. In this case, they may want the employer to put in some money to bring the other scheme up to a similar level of funding, Hunter said.
He added that “deciding what the new trustee board looks like” may also pose challenges.
Vassos Vassou, senior trustee representative at Dalriada Trustees, agreed that amalgamating schemes means “you can perhaps have a reduced number of meetings a year with advisers, a smaller pool of advisers [and] a smaller group of trustees”.
This not only saves money, but also saves time. Senior management will be “dealing with one group of people rather than several disparate groups of people – and that time is money”, Vassou noted.
“If it can be done, and done properly, then there has to be some overall benefit to just running one big scheme versus running potentially lots of little schemes… it makes sense,” he added.
Make sure members’ benefits are secure
Nigel Cayless, associate director at law firm Sackers, said that “another driver might be just harmonising the benefit structures”, though this would not be relevant for closed schemes.
Furthermore, a bigger fund with more assets may have access to more sophisticated investment opportunities, he added.
“Both trustee boards would want to ensure that… going ahead with it is in the interests of their members. They can take the interests of the employer into account, but that’s not the primary driver,” he noted.
Cayless added that the key point for trustees, when faced with a merger proposal, is whether members’ benefits are more or less secure in the receiving scheme.
Segregated or full merger?
It is also important to consider whether the merger is going to be done on a segregated basis or a non-segregated basis.
In a segregated situation, the transferred scheme will sit in its own ring-fenced section of the receiving scheme with separate actuarial valuations.
“An employer is going to be more keen to do it on a non-segregated basis, where everything’s just mingled in together,” Cayless said, adding that there is less of a cost saving for the employer if the merger is on a segregated basis.
