Stagecoach tightens governance reins with scheme merger

While some companies with multiple pension plans look to consolidate governance arrangements by merging trustee boards, others choose to go further by merging the actual pension funds. This can be done by creating separate scheme sections within a merged fund, or can be a complete amalgamation of all assets and liabilities.  

You can’t really merge scheme A into scheme B unless the funding levels are pretty much in line, because otherwise member security of the receiving scheme will be diluted

Janet Brown, Sackers

“During the year ended 30 April 2016, the East London and Selkent Pension Scheme was merged with the Stagecoach Group Pension Scheme,” states Stagecoach’s latest annual report, adding that “a separate East London and Selkent section of the Stagecoach Group Pension Scheme is now maintained”.

The £1.3bn Stagecoach fund’s 2014 triennial valuation showed it was 111 per cent funded on a technical provisions basis. 

Stagecoach did not disclose the size of the East London and Selkent Scheme. However, the report reveals that it underwent a valuation a year before the Stagecoach scheme, and was 100 per cent funded on a technical provisions basis at that point.

Funding levels

Maintaining a separate section usually means the previous scheme still has its own valuations, audit and accounts, noted Janet Brown, partner at law firm Sackers.

Usually, if a separate section is not maintained, “you can’t really merge scheme A into scheme B unless the funding levels are pretty much in line, because otherwise member security of the receiving scheme will be diluted when you put the underfunded scheme into it”, she explained.

Brown said merging schemes but maintaining a separate section is a step towards rationalising pension funds, and can also result in savings when it comes to governance and advice, although there is still the cost of carrying out separate actuarial valuations.

Eventually, once the funding levels of the schemes become more in line, a company can “de-sectionalise” the scheme and “all the assets and liabilities are then valued as one”, said Brown.

Matthew Giles, partner at law firm Squire Patton Boggs, said merging a scheme but keeping a section means that in effect, “you’ve still got two schemes within one, and in many respects you still treat a section as a scheme in its own right”.

"[Merging] falls into the category of proactive management of the cost and risk associated with defined benefit schemes,” he said.

Although they have always been around, there is a trend at the moment for both mergers and demergers, said Giles.

Improving performance

Efficiency is a key driver for merging schemes, according to Giles. “Even if there are separate sections… you’ve still got a single trustee board running the whole thing,” he said.

This means that the hours associated with running the scheme “will shrink as a result of this”, he added.

Depending on the sizes of the merged pension funds, “it may well be that they start to put the schemes on a similar investment strategy… and you may be able to access investments that were otherwise outside of your price range”, Giles said. 

He noted that efficiency can be further increased if schemes are fully merged, without separate sections involved.

Vassos Vassou, senior trustee representative at Dalriada Trustees, said that as a trustee, “you’re there to look after the members”, so it is important to make sure that the “members are not disadvantaged by the merger, both now… and in future”.

Key points to consider include taking into account the covenant of the scheme and the funding position of the scheme before and after schemes are merged, he said.