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Malcolm McLean: Bigger may not be better for pensions

Questions remain over whether consolidation will prove successful for defined benefit pensions and the guidance bodies

 

For several years now there has been a growing trend for bringing organisations together, replacing a number of smaller units with one big one for the purposes of greater efficiency and to achieve economies of scale.

We have seen it with mergers and acquisitions in the City, with insurers, law firms and so on. It has happened in the NHS, with the growth of big hospital trusts and the development of group GP surgeries. Government departments have also been combined with a view to providing a more targeted service, and even MPs’ constituencies are to get bigger following the latest boundary commission changes.

I am not sure everyone is convinced the concept “big is beautiful” is necessarily a good one but we are all increasingly having to accept it as the norm.

On this theme, a buzzword across the pensions industry at the moment is “consolidation”. This takes different forms in different contexts, but it is essentially about trying to achieve better results/performance by avoiding overlaps and taking advantage of the benefits of scale. It is a very hot topic which enthuses some and dismays others. Let me give you two examples.

First off, the House of Lords has been scrutinising a Bill that will bring together the combined forces of the Money Advice Service, Pension Wise and The Pensions Advisory Service into a new single guidance body. The exact modus operandi has yet to be fully developed but it is believed it will be able to deliver a more joined-up service to those who need it.

I hope they are right. My experience with TPAS is of a small organisation that punches well above its weight and regularly receives plaudits from the public for the quality of the service it delivers. The contrast with MAS both in terms of size and overall reputation is marked. How they will fuse together is far from clear.

Who will be doing the face-to-face stuff Citizen’s Advice currently does as part of Pension Wise? And where does the army of volunteer advisers TPAS uses fit in? Indeed, will the dispute resolution activities the volunteers predominately deal with be part of the new service at all, or will they be hived off into the back office of the Pensions Ombudsman? Plenty of questions, which at the moment (publicly at least) do not appear to have answers.

The other issue where consolidation is featuring relates to the viability of the 6,000 or so defined benefit schemes. Many of these are quite small and it is thought they could gain better value by pooling their resources or merging some or all of their functions together. We had a Green Paper before the general election and have been promised a White one in the winter.

I have little doubt economies of scale could be achieved in this area. Experience with the local government pensions scheme has shown the scope for much bigger investment returns that pooling can produce. Also, combining administrative services saves money and a larger scheme can usually negotiate reductions on fees and charges with their professional advisers.

But – and it is a big but – many trustees will be reluctant to agree (unless they are forced) to go down this particular route. They take a pride in “running their own show” and are not especially enamoured at being involved in multi-employer type schemes which historically have experienced problems arising from the structure and formation they have adopted.

Both in relation to the new single guidance body and DB pensions it will be interesting to see whether consolidation proves to be successful for the industry and consumer. The clock is ticking on both counts but it may be some time before we find out for sure.

Malcolm McLean is senior consultant at Barnett Waddingham

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