...I'd probably be out of a job.
Notwithstanding the very real value we have returned to clients over the last 33 years, had an imaginary, munificent higher power granted humankind – and pension funds - an idealised existence, our industry would look very different.
In such a world, sunlit Roman-straight roads would lead directly to an identified destination and there would be no need for me and my contemporaries to help clients navigate a treacherous landscape of quick sands and hidden ravines blocking the way to what could be a gleaming city on a hill.
A little florid though this flight of fancy may be, I say this as I look at the calculation of what smaller defined benefit schemes would save were they to join forces.
My colleagues at our new venture Stoneport have calculated that if the UK’s schemes with fewer than 1,000 members – all 4,250 of them – were to combine their assets in our new vehicle, they would collectively save £40bn* in running costs between now and a buy-out targeted for 2045.
If you’re curious, you can see what your pension scheme would save, here.
Model pension scheme
Naturally, dramatic savings like these would ultimately be good news those whom the pension schemes were set up to serve: the members.
By cutting day-to-day spending, reducing investment management fees, enjoying the returns of improved governance such scale would bring and keener pricing on the eventual (mammoth) buy-out, the savings would be substantial, to say the least.
But as we all know, we don’t live in an ideal world.
We have always strived to improve the reality of pension schemes for members, trustees, sponsoring employers and everyone else with a stake in a vital part of our society and economy.
The fact is that there’s always room for improvement and innovation. That’s how we have built our business since 1988.
Naturally, it would be very welcome if our proposition were to automatically on-board all 4,000-plus schemes but it’s also very unlikely.
But we do see it as realistic for 100 or so to do so on the basis that they will not only save up to 80 per cent on their running costs but also offer stronger protection against the main – and often unspoken – reason for pension funds failing: the insolvency of the sponsoring employer. All of which strengthens the chance of members being paid what they are due.
We believe that’s a compelling argument by itself but, as ever in pensions, the numbers don’t do all the talking.
It also makes sense for the chief executives, finance directors, HR directors and company secretaries who are not only trying to run their principal business but continually find themselves dragged back into the legal and regulatory complexity of the pension scheme, itself often likened to running a particularly complicated financial services company.
Stoneport would relieve all these individuals of their various and considerable responsibilities, meaning they could focus entirely on running their business. And likewise Stoneport lessens the burden on the pension scheme trustees who carry onerous personal responsibilities. Headache and worry saved? Qualitatively significant.
Obviously, I don’t put myself in that category because our day job has pretty much always involved pensions but we do back our own thinking and have placed our own legacy DB scheme into Stoneport as the first entrant.
I’m surprising no-one when I say all DB pensions matters have to be handled sensitively but what I do believe is that we can offer a real-world solution to the issues which continue to weigh down on employers and trustees.
*Footnote for £40bn saving:
- The running cost savings are calculated using industry figures for the number of current and future pensioners in all schemes with less than 1,000 members, by comparing the running costs they actually incurred (as set out in IFF Research’s running costs analysis for the Pension Regulator from 2014) with those they would expect to pay within Stoneport based on the long-term contracts it has secured.
- The investment management cost savings are based on an estimate of the potential saving economies of scale and efficiency could bring.
- The good governance premium is a conservative estimate based on research cited by the DWP that large, well run schemes can generate materially higher returns from better oversight and greater access to expertise.
- The improvement in buy-out pricing with insurers is an estimate of the benefit of scale, and that a multi-billion deal would attract increased competition in the market (if the user inputs the latest buy-out funding level).
In addition to these savings, the online modeller illustrates the potential reduction in the risk-based element of the protection levy payable to the Pension Protection Fund (PPF), which arises because of Stoneport’s centralised structure (if the user inputs the current levy).
Stoneport’s focus is on the running cost savings element, but it acknowledges the material further benefits possible from the other cost savings, as noted.