The Superannuation Arrangements for the University of London has detailed its merger policy as part of work to help achieve economies of scale across support staff pension schemes.
Case study
The Royal College of Art merged its scheme with Saul in 2010.
The old RCA scheme had a significant deficit and because it was small, administering it was expensive and time-consuming, said director of finance & planning Nick Cattermole.
“Although the college had to pay Saul a capital sum to take on the liabilities of the scheme, this was a much smaller figure than the actuarial deficit," he said.
"There was also a significant revenue saving as Saul's employer contribution rate is much lower. Removing the old scheme from the college’s accounts strengthened the balance sheet considerably."
Defined benefit schemes have sought merger policies that protect against any adverse impact on members' benefits.
The multi-employer scheme was asked to more clearly articulate its merger policy by the Universities and Colleges Employers Association, said chief executive Penny Green.
"If you go back six or seven years, UCEA did a lot of work on how to try [to] get economies of scale across the support staff pension schemes [in] the sector, and this is really a continuation of that work," she said.
The most important consideration for Saul when deciding to merge a scheme is whether the security of existing members’ benefits would be put at risk.
It considers whether the scheme has active members, its assets, any additional contributions the employer is prepared to make and the strength of that employer’s covenant, Green said.
“Ideally any merger would enhance and improve that security,” she said.
Any new sponsoring employer must meet the difference between the incoming scheme’s funding position and that of Saul, plus pay a risk premium.
Saul takes actuarial and legal advice on the risk premium, which is informed by the strength of the covenant and the level of incoming liabilities.
Negotiating terms for merger
Trustees of an incoming scheme will want to consider the security of their members’ benefits and how their power may be affected as a result of merging, according to John Breedon, director and head of corporate consulting at JLT Benefits.
“It’s quite rare now but members might have their benefits changed as part of the merger,” he added.
The quality of member data, the scheme’s liabilities and the assets that Saul requires to support those liabilities are areas around which it negotiates.
However, Green said: “The Saul trustees are very clear about the sort of benefits they are prepared to offer and there is very little around that that we negotiate.
“Certainly before merger there might be some conversations around pre-merger service and how that’s considered,” she added.
Universities Superannuation Scheme has accepted several schemes, including the former Open University Superannuation Scheme.
Brendan Mulkern, head of policy at USS, said the matter of future service benefits is relatively straightforward given that those future terms are on the basis of the USS standard benefits.
“With regard to the past-service rights which transfer, there are rules and guidelines which determine how those benefits should be protected, and in our experience an open dialogue between the scheme trustee, employer representatives and their advisers, with USS, has enabled those requirements to be met, while also reaching an acceptable outcome for all parties,” said Mulkern.
“The USS mergers policy provides further support for institutions in dealing with these issues,” he added.
Merging schemes can reduce the amount of time employers spend managing their pension arrangements, make governance easier and reduce costs of financing the scheme, said Breedon.
“It’s got to be a win for the company and it’s got to be a win for the trustees who represent the members,” he said.
