There appears to be a great deal of confusion in the UK about multi-employer schemes and this confusion does involve pension advisers.
At the moment there are many multi-employer schemes for associated employers. Examples are a large company or corporation with a number of subsidiary companies. A pension scheme is set up in the name of the corporation but all of the subsidiary or associated companies can participate in the same scheme. An example is Unilever. The operative position is that all the companies or employers are associated.
Another possibility is a multi-employer scheme(MES) for non-associated companies but under existing Inland Revenue rules, the non-associated employers must be in the same line, or very similar line of business. These schemes are known as industry-wide schemes and examples are RailPen and USS.
At the moment the Inland Revenue will not permit multi-employer schemes where the employers are neither associated nor in the same line of business. The reason for this is the likelihood of significant cross subsidy between companies or employers with no link or association.
However, the Government is keen to promote private pension arrangements. Stakeholder has not been a success story so there could be another option of multi-employer schemes for non-associated employers, which I shall now define for the purposes of this article as Multi-Employer Schemes (MES).

Everybody unless they have been on another planet will have seen the so-called flight from defined benefit (DB) to defined contribution (DC). The reality is somewhat different.
Final salary schemes are being closed to new entrants or, even worse, future accrual and stakeholder schemes are being set up at a much lower contribution rate. Most of these stakeholder schemes have very few or no members. Pension providers are pulling out of stakeholders as they are losing money and commission for independent financial advisers (IFAs) is very parsimonious. The result is that reality is the flight from DB to nothing.
Even if people were to join the stakeholder plans, just to dump all the risk on to employees and for employers to pay low rates of contributions (in some cases nothing) is bad news all round. There is a pension time bomb which is going to go off with a huge bang sometime in the future. DC is a real problem area. Asset values can fluctuate by huge amounts, lifestyling and drawdown are flawed and annuity rates can fluctuate by huge amounts. DC is dangerous.
A Multi-Employer Scheme(MES) may be the ideal rescue vehicle. If such a scheme were set up on the Career Average Revalued Earnings (CARE) basis, prudently funded with some form of member profit share, then we have huge possibilities. Under final salary, a member gets a percent of his or her final salary for example 1/60 th of final salary for each year. This favours the high fliers and somebody getting a large pay rise late in life really benefits. Under a CARE arrangement it is very different. The basic design is that each year a member gets a pension credit as a per cent of salary, for example, 1.25% of salary each year. At retirement all these amounts earned each year are then revalued say by RPI up to retirement date. It is less onerous than final salary and the low fliers do not subsidise the high fliers. Cross subsidies between employers are much reduced compared to final salary designs. Also, it is much fairer for those who have fluctuating hours and pay. The administration is simple.
The benefits are realistic and reasonable – this is important. The benefits provided under existing final salary schemes are now far too generous. We started off with these schemes providing 1/60ths, but nothing for early leavers and no pension increases during retirement so that in real terms they were not generous. However government intervention required benefits for early leavers plus indexation of benefits. That made the schemes much more generous and with falling inflation the schemes are virtually index linked. We now have, through bad planning, what I would call ‘super 60ths’.
The funding for a CARE design MES can be on a very prudent basis so that surpluses (remember those?) will occur. The idea is that on the assumption that these schemes should be run on high solvency ratios, surpluses above these levels can be distributed to members to be invested on a DC basis. At retirement the member gets a pension based on the CARE formula plus a DC pension from the ‘profit share’ distributions. If the experience of the scheme were not good the members’ profit shares would be low and vice versa. What we want to avoid is to keep changing employers’ contribution rates. In order to minimise funding issues, it would be very important to learn from the mistakes of the past and ensure that the investment strategy is properly linked to the projected liabilities.
The CARE design is ideal for a multi-employer scheme arrangement. I work for an industry-wide scheme and we have been offering this design for about three years. Furthermore the government is now promoting it as the public sector design for the future.
MES could be set up in a variety of ways. The first option could be a regional scheme for example the Coventry Chamber of Commerce MES. (I’m not promoting this at Coventry – just a fictitious example). Many small to medium sized employers could find this a useful way to provide decent pensions and they can avoid the serious problems of staff just being left to participate in DC schemes with all the inherent individual risks. An alternative option could be a particular industrial estate.
Trades unions may be keen to promote such schemes where they have collective bargaining rights and thus a multi-employer scheme could be set up but it would not be regionally based.
It may well be that employers do not want to provide pensions for their employees but I am assuming that employers will want to provide good schemes with realistic benefits at an acceptable cost.

The National Association of Pension Funds (NAPF) has set up a Multi- Employer Schemes Working Group to make the setting up of such schemes as painless as possible. The areas still to be finally resolved relate to employers becoming insolvent and the Pension Protection Fund. The working group has involved the Inland Revenue and the Department of Work and Pensions as well as representatives from the Government Actuary’s Department. The NAPF is confident that such schemes will be permitted from April 2006 and that the NAPF will be able to provide support and advice to any interested organisation. More information can be obtained from the NAPF’s Multi Employer Schemes Working Group secretary who is: Jacki Johnston, The Pensions Trust, Verity House, 19 Haymarket Yards, Edinburgh, EH12 5BH (Tel: 0044 131 341 1274 email
Final salary schemes are closing. DC is a real danger area and stakeholder has been a failure. A multi employer structure based on the CARE design appears to be a win/win. Furthermore, unlike DC and Stakeholder schemes, a multi employer scheme set up on the basis of a trust contract – probably with elected and/or nominated trustees has a big big advantage which IFAs do not tend to point out. Trustees have a legal fiduciary duty to look after the best financial interests of the members and beneficiaries. Under DC and stakeholder plans the pension providers tend to look after their own bottom lines.
Multi-employer schemes are a great success in the Netherlands and Australia. Why should they not become a success in the UK?