Sole Trustee versus Consolidator

11th December, 2019

  • For the uninitiated, read only the title and this blog might draw you into the world of a hip-hop collaboration that’s about to ‘drop’ – or perhaps a review of a WWF wrestling match. But, with all the surprise of another day filled with even more political promises, it will come as no great disappointment to know that it’s neither.  

    Instead, I would like to focus attention on two very different solutions for dealing with the issues confronted by small defined-benefit schemes. These issues will be familiar from previous blogs – how to ensure high standards of governance, value and security for members.

     

    Sole trustee

    DB consolidator

    How it works

    Corporate body that takes on all the duties of the existing scheme trustee board.

    A private company that brings together defined benefit pension schemes. The consolidator runs the scheme under its own pensions trust framework.

    Market practice

    Sole trustee appointments ideally should be taken by properly resourced professional trustee firms who can provide a diverse team of suitably qualified trustees to oversee the scheme.

     

    Relative newcomer to the DB market; only two main players currently. No substantial track record to benchmark.

    How scheme governance improves

    Scheme is managed and governed by experienced pensions professionals.  Structured processes to ensure consistent decisions covering governance, investment matters, risk, administration and member communications.

    Scheme trustees need to be satisfied that the commercial consolidator will provide high standards of governance.  Responsibility for governance sits with the consolidator trustees but delivery sits with the in-house executive function.

     

    Member security

    The sole trustee represents the members and acts on their behalf (similar to a board of trustees).  The sole trustee will negotiate with the sponsor and the company covenant remains important.

     

    Trustees’ concerns will be focused on loss of covenant support and lack of regulatory guidance. Need to satisfy themselves that consolidator sufficiently matches ongoing support of sponsor. Employer link with scheme will be lost.

    Impact for sponsoring employer

    Sponsoring employer is freed up from time-consuming scheme commitments. No changes for scheme or membership. Employer maintains control working with the trustee to ensure the security of members’ benefits.

    Scheme will normally need a significant cash injection from the sponsoring employer in advance of entering the consolidator. Only a small proportion of DB schemes will be able to consider consolidation.  Future profits go to the consolidator not the sponsor.

    Planning for the end-game

    Sole trusteeship can provide an efficient executive management model to implement a journey plan and decrease the impact of the scheme on the employer’s balance sheet over time.

    Trustees need to consider member outcomes over long term and weigh up the decision to sever ties with the sponsoring employer. May be difficult for trustees who already have ongoing covenant support to agree to a transfer to a consolidator.

    With more than 3,000 defined benefit schemes in the UK having less than £50m of assets, there is an increasing focus on how to engage those schemes to comply with basic requirements – and, in turn, raise their governance standards.

    Consolidation can provide a clean break for the sponsoring employer from the pension scheme in exchange for a value related to its covenant – and in theory, at a cost more affordable than a buy out. However, the question for the sponsor may be whether they are over paying for this clean break and whether it is financially better to retain control of the scheme.

    Sole trusteeship can give a pension scheme access to all the trusteeship skills it needs to keep up to date with legislative and regulatory guidelines, with no major changes for the scheme and its members. The sole trustee can then begin to plan for the end game without an immediate financial hit to the employer.

    Undoubtedly, the spotlight of regulatory guidance will increase demand for solutions which could see both of these options, and others such as DB master trusts and buy-outs, becoming increasingly common in the short to medium term.  

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    • Published byVassos Vassou

      Vassos is a Director of Dalriada Trustees and an Accredited Professional Trustee based in our London office. He entered the pensions industry in 1995. Vassos works on a broad range of Dalriada clients. He currently works with nine schemes ranging in...

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