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An idea whose time has come

As debate continues in the UK
over the future of pensions,
the proposal to found multiemployer
‘Super Trusts’ has many
supporters. The National Association
of Pension Fund’s idea for
umbrella pension schemes under
which many employers would shelter
has many advantages – most
obviously economies of scale.
But how well do multi-employer
pension schemes work in practice?
Countries such as the Netherlands
and Denmark already have highly
developed systems of multiemployer
pension scheme, which is
why some in the UK are looking at
their experience to shed some light
on the workability of the Super Trust
proposals.
Although the Netherlands has
many pension schemes which are
used by a whole group of employers
to provide staff retirement benefits,
these are mostly industry-wide
schemes.
This does have certain advantages,
says Peter Borgdorff, director of the
Verenigning van Bedrijfstakpensioenfondsen
(VB), the Dutch Association
of Industry Wide Pensions.
In the Netherlands, it is compulsory
to belong to one of the industry-
wide schemes if you work in an
industry where one operates. “The
arrangements are closely linked to
the labour agreements for workers in
the sector,” says Borgdorff, and the
pensions agreement is part of the
labour agreement.
“This gives the scheme its own
identity. Everybody in the scheme is
working in the same job, and that
makes it strong,” he says. “Because
it is linked to the labour agreement,
there is just one package of employee
benefits.”
Many people in the Netherlands,
however, are not able to join one or
other of the industry-wide pension
schemes available.
Borgdorff says there are thousands
of companies whose employees fall
outside the scope of the industrywide
schemes, and their employers
are forced to make costly arrangements
with insurance companies for
their staff.
This issue is being discussed in the
Netherlands, he says. The alternative
for these employers would be to
start their own pension fund,
though this would be too small to be
viable in cases where the company
employs less than 150 people.
“And if you go to an insurer you are
paying a lot for a good pension,”
he says.
So the VB and other parties in the
industry are talking to politicians in
the Netherlands about the possibility
of establishing real multiemployer
schemes where participating
employers do not have to be in
the same industrial sector.
“Then you would be able to build
up a bigger scheme,” says
Borgdorff.
But this would not be simple. The
age of the employees involved
would be different, and some might
be white collar workers and others
blue collar. “We don’t think it’s
easy to combine,” he says.
“But there’s no need to have only
one multi-employer pension fund,”
he says. “The scale must be large
enough to give the benefit – there
would have to be a few thousand
people in it to really make a profit out
of it.”
In Denmark, most pension funds
are occupational or industry-wide.
Some single corporate pension
funds exist, but they are mostly
small.
Industry-wide scheme PKA
(Pensionskassernes Administration)
includes eight pension funds which
are all occupational pension funds.
It has nearly 210,000 members,
employed mainly in the public social
and health sector.
This means, says Claus Skadhauge,
head of information at PKA, that it is
above all the education and occupation
that determines membership
and not employer.
“But in PKA’s case the employers
are more or less similar,” he says.
“They are normally big and have
efficient HR/Personnel departments
taking care of the payments in
an effective way.”
However, PKA also has around
800 small employers which are not
quite so clear on the logistics of managing
pensions administration, he
says.
The NAPF’s Super Trust idea is
being offered up as an alternative to
Pensions Commission’s National
Pensions Savings Scheme. The
NAPF’s chief executive Christine
Farnish has said Super Trusts would
be not-for-profit large-scale bodies
whose sole job was to get a good deal
for customers.
There would be up to 20 of them
nationally, and they would be collective,
defined contribution
schemes into which workers would
be automatically enrolled.
“They would run at low cost and
manage investments in a collective
way, thus reducing the risk for individuals
and doing away with the
need for people to make complicated
investment choices themselves,”
she said.
This would get around the dangers
of having a single all-powerful institution
that is close to government,
Farnish said, and it would also avoid
the risk of setting up a huge new
infrastructure to collect and allocate
savings.
As chief executive of the Superannuation
Arrangements of the University
of London (SAUL) Penny
Green knows all about the challenges
a pension scheme faces when
several employers are involved.
“There are a whole range of
issues,” she says. Of these, one of
the most contentious is the way
employers in such a scheme have to
pay into the pension protection
fund to safeguard their members in
the event of them going bust.
As things stand under UK law, in a
multi-employer pension scheme,
the levy paid through a multiemployer
scheme takes little
account of the reduced risk it faces
because of its inherent diversification.
The pension protection fund
would not have to pay out unless all
the employers in the scheme were to
become insolvent – a highly unlikely
scenario.
This has to be resolved, says Green.
The problem stems from the Pensions
Act 2004. “Many of the regulations
have been written on the
basis that there’s a single employer,”
she says. It is not easy to extrapolate
that because there are so many different
types of multi-employer
scheme in existence, she says.
Apart from the levy, there are other
areas where the existing pensions
law poses difficulties for multiemployer
schemes in the UK. For
example, there must be agreement
for the scheme to draw up a statement
of investment principles. “It is
the word ‘agreement’ that is the
problem,” says Green.
In a scheme where there are, say,
100 employers, some larger than
others, what, she asks, should the
scheme do when one of the smaller
employers does not agree? “The regulations are not clear,” she says.
“How you apply the levy regulations
in working out what our risk
relative to the levy should be, can be
difficult,” she says. There needs to
be more detail and the regulations
ought to take account of the variations
in the composition of multiemployer
schemes. Some may be
sectionalised (divided up into minischemes
for each employer) while
others are not. Some have a handful
of employers, while others may
have 1,000.
The risk of overall insolvency could
be negligible, if, for instance, a
scheme were to take the strongest
employer and use its Dun & Bradstreet
rating. “There are a lot of
complications floating around,”
says Green.
Richard Stroud, CEO of the Pensions
Trust in the UK, agrees that
the way multi-employer pension
schemes have to pay levies to the PPF
is problematic. “It’s a real rip-off,”
he says.
The Pensions Trust is a multiemployer
pension fund in the UK
which caters for the charity and voluntary
sectors. It is run on both DB
and DC bases, includes 4,000
employers and has 115,000 members.
The part of the levy which is in
question is the risk-based levy. It is
based on the probability of sponsors
becoming insolvent, says Karen
Parry, head of compliance at the
Pensions Trust.
However, it does not take account
of the cumulative probability, she
says. Though there is a reduction for
schemes which have a very large
number of employers, it does not
reflect the real lowering of risk, she
adds.
“The price you are paying is substantial,
but the cover you get is
not,” says Stroud. But the government
is unwilling to listen to objections
from the multi-employer
schemes,” he says.
One of the other issues for multiemployer
pension schemes, is that
they are not necessarily aware of
whether their members have been
seconded overseas or not. And this
can have implications.
“We’re having to look carefully at
the information from our employers
to make sure we don’t tip the balance,”
says Green. If a scheme does
have a certain
proportion
of
its members
working
in
a n o t h e r
EU country
while
s t i l l
remaining
in the
employ of
the UK
employer,
then the
scheme becomes subject to the
requirement to become fully funded
within two years. Multi-employer
schemes often do not correspond
directly with members, so they can
be unaware of their geographical
location. “The complexity of applying
the regulations
in a multi-employer environment is
in some ways greater than in a single
employer scheme,” says Green.
Also in the UK, Railways Pensions
Management (Railpen) is a multiemployer
scheme created by the privatisation
of the railway network.
The British Rail network was split
into some 100 different pieces, and
those separate employers now participate
in the Railpen scheme.
Chris Hitchen, executive chairman
of Railpen and chairman of the
NAPF’s investment council, says the
scheme is effectively running 100
different actuarial profiles. But
through pooling the assets, there are
economies of scale. There is a common
approach to administration
and better terms for investment.
The Railpen scheme is mainly
defined benefit, Hitchen points out,
and in that way is different from the
NAPF’s Super Trust proposal.
“Some multi-employer schemes
work differently, with all money put
into the pot; they don’t keep track of
who’s paid what – there’s much
more sharing,” he says.
One of the impediments to the efficient
running of multi-employer
schemes has recently been eliminated
by the Inland Revenue. “In
the past in the UK, the Inland Revenue
hasn’t allowed cross-subsidy
across schemes,” he says. But under
new rules which came into force at
the beginning of the current tax
year, cross-subsidy will now be made
easier.
“In any defined benefit scheme
there are inevitably cross-subsidies,”
he says. It all depends how much
salary escalation there is for employees
and when they leave the company.
The new Super Trusts could be run
by existing pension schemes.
Railpen, for example, could include
more employers in its scheme by setting
up a defined contribution side.
“We haven’t decided to do that,”
says Hitchen, “But it’s certainly
something that we would be interested
in.”
Of course, taking in new employers
might mean including members
from different industrial sectors,
while Railpen is now a single-sector
scheme. There is certainly something
to be said for sticking to one
sector, he says. “There’s a degree of
familiarity between the members,
and there are certain common standards
within the industry.
Similarly, Penny Green sees advantages
in the industry-wide model.
“It makes sense to structure it on an
industry basis, because where you
get mobility – staff are likely to move
from one university to another – you
can still have continuity in your pension
arrangement.”
Skadhauge of PKA also cites
mobility of the labour force as an
obvious advantage of an industrywide
scheme. “For example, a nurse
employed in one hospital is able to
move to a job at another hospital or
a doctor’s practice without any pension
consequences,” he says. “She is
still a member of the same fund with
exactly the same rights as she had
before. This is in fact one of the
objectives for an efficient pension
infrastructure according to the
EU.”
Also, says Green, if the scheme is
set within one industry, there will be
the same philosophical approach,
the same culture and the same types
of staff. But another model could
also work as long as the employers
had some factor to link them. “I
don’t see why you couldn’t have a
regional grouping,” she says.
Hitchen agrees that a regional
arrangement would be another way
of arranging a Super Trust. “For
example, we run our administration
from Darlington, and we’re known
quite well in the North East,” he
says. “That would be another way to
grow a multi-employer scheme.”
Any multi-employer scheme, particularly
those taking on new and
smaller employers, will have its
own particular problems to solve.
In Denmark, PKA outlines the key
challenges it faces as a multiemployer
scheme. The first is cost
effective administration, says Skadhauge.
“We have established an IT-based
system for reporting and paying
contributions. This system is available
to all small employers via our
web-site. Major employers’ administrations
are all based on large ITsystems.”
Identifying members is another
challenge, though this is no real
problem for the eight PKA member
groups since they are all highly
organised trade unions. Also, in an
environment where there are many
employers involved, there has to be
good communication.
“In a company pension fund you
are able to establish effective communication
channels. With multiemployers
you must establish other
ways of communication with your
members – web-sites, individual
member services, magazines, letters
etc. In PKA we have succeeded
doing so; among other things due to
the number of members. That
makes it possible for us to develop
communication structures in a costeffective
way.”

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