TRW Pension Plan merges with ZF schemes

ZF Friedrichshafen acquired TRW Automotive nearly four years ago. At that time, TRW had one UK DB scheme, the TRW Pension Plan, and ZF had two UK DB schemes.

It is possible to eke out more efficiencies from their administrator by merging schemes, but it requires investment

Daniel Taylor, Trafalgar House

In January, trustees of the TRW Pension Plan announced that it had merged with two other company pension schemes.

“The assets and liabilities of the ZF Lemforder UK Pension Plan and the ZF Great Britain Retirement Benefits Scheme were transferred to the TRW Pension Plan on December 31 2018,” an update states.

A ZF spokesperson says that following the acquisition of TRW, ZF reviewed the TRW UK DB plan and the two ZF UK DB schemes, “and decided to merge the three separate plans into one for efficiency reasons”. The trustees of all three plans agreed with the company’s proposals.

“The merger took effect from December 31 2018 when the two former ZF plans transferred their assets to the TRW Pension Plan along with the responsibility for the payment of benefits,” the spokesperson says.

The TRW Pension Plan has now been renamed the ZF UK Pension Plan, “and has a significant surplus on its technical provisions funding basis”.

Pension scheme mergers are usually company led. They can result in numerous cost savings, such as reduced investment, actuarial and legal advice fees depending on the type of merger.

A sectionalised alliance only brings together certain parts of the scheme, such as moving to one trustee board.

A full merger, however, also amalgamates the assets and liabilities of the pension schemes. Sectionalised mergers are sometimes seen as a step towards a complete merger at some point in the future.

Limited admin opportunities

There is no doubt that consolidating two or more schemes into one can lead to lower fees and potentially better governance, but are there any administrative advantages to carrying out a merger?

Daniel Taylor, director at third-party administrator Trafalgar House, says that trustees and sponsors often expect a huge benefit from merging schemes.

However, he notes that “for administrators the opportunities that it gives to consolidate and make operations more efficient are fairly limited”, pointing out that mergers do not in themselves create any kind of benefit harmonisation.

“The opportunities are there, but they are quite limited and they tend to be around the periphery of the administration service,” Mr Taylor says.

For example, once schemes are fully merged only one set of year-end accounts will need to be produced, and there will be only one set of management reports to trustees.

“It can make the governance a little bit simpler,” Mr Taylor notes. However, it does not usually create efficiencies in terms of member service, “because you still have to operate those arrangements within their existing benefit structures”, he adds.

Make sure members understand

In fact, mergers can sometimes create confusion from a member’s perspective, according to Mr Taylor.

“These schemes tend to get a new name or a new wrapper applied to them, which for many scheme members , especially in legacy DB arrangements, they don’t know that sponsor, they don’t know that scheme name,” he says.

“When both of their benefits are drawn under one wrapper and they’ve got service within two arrangements, it can often become a lot more confusing for them because they only see a single benefit.”

Good scheme communication is therefore key to help members understand the change and why it is happening.

Trustees and sponsors have to think very carefully about what the aims of any type of consolidation are, Mr Taylor adds, noting that “if it’s with a view to create more efficiency and cost saving within the scheme, then they have to think about how structurally that will be achieved”.

Be prepared to invest in improved admin

“It is possible to eke out more efficiencies from their administrator by merging schemes, but it requires investment,” he says.

Unless they are prepared to pay for implementation of new consolidated communications, automation, and new digital platforms that provide access to consolidated data and benefits, then Mr Taylor says schemes are “unlikely to get any benefit”.

In 2016, Stagecoach Group announced it had merged one of its smaller pension funds with its larger DB scheme, but it decided to maintain a separate section for the smaller scheme, keeping liabilities separate.

More recently, in April 2018 Coats proposed a full merger of its three DB schemes to boost efficiency and reduce costs. The trustee board subsequently agreed to the proposal, which took place in July.

“We see a lot of trustees looking at this option – mergers – in order to consolidate service providers in some respects to get more efficiencies, so it is a popular step. We see more and more schemes doing this,” Mr Taylor says.

He adds that trustees and sponsors should be realistic about what could be achieved in terms of administration when “pushing two schemes together that have very different benefit bases”.

Girish Menezes, director at the Pensions Administration Standards Association and head of administration at Premier Pensions, says that with regard to mergers, “efficiencies are largely around the actuarial efficiencies, legal, the ability to manage the investments across the various sections rather than individually by separate trustee bodies, and nobody focuses on the administration aspects”.

While there are some big administration opportunities when merging, they are often seen as too laborious.

“During scheme mergers it is possible to harmonise benefits, but it rarely ever happens,” says Mr Menezes. This is because it is seen as too complex, or there are legal issues and pressures from the trustee bodies involved.

Through harmonisation of benefits, he notes that administering a scheme is much more efficient and leads to a reduction in risk and errors, as well as communication benefits and improvement in the speed of responding to member queries, for example.

Even something relatively simple such as consolidation and alignment of payrolls and payroll dates “is generally not addressed because it’s in the ‘too difficult bucket’”, Mr Menezes says.

Trustee representation

When schemes are merged, the number of trustee boards is reduced to one.

Some schemes choose to do this without carrying out a merger, such as Lloyds Banking Group’s decision in 2016 to merge the trustee boards of three of its DB schemes to boost efficiency, minimise duplication and boost its relationship with the schemes.

Vassos Vassou, senior trustee representative at Dalriada Trustees, says that “one of the things you’re trying to do is reduce the number of meetings, reduce the number of people involved, and so on, as a main benefit from a trustee’s perspective in terms of time and governance”.

However, when merging, the trustees on each board are usually keen to make sure their voices are heard on the new board, Mr Vassou notes.

For example, “you’d want at least some member-nominated representation usually from each of the separate schemes”, he says.

He adds that, over time, “the new structure beds in and works… then some of those initial concerns about looking after your own fall away a little bit”.

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