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Merger of UK DB pension schemes would face obstacles, says Aon Hewitt

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  • Merger of UK DB pension schemes would face obstacles, says Aon Hewitt

UK - Merging UK pension schemes to allow for greater economies of scale would be problematic because of the inherent differences of opinion between scheme sponsors and trustees, Aon Hewitt has said.

In a report published earlier this week, the Workplace Retirement Income Commission (WRIC) said the government and the Pensions Regulator should develop measures that would "encourage the consolidation of small schemes into larger, better value schemes".

The issue has been raised several times in the past, with similar suggestions made to consolidate the local government pension fund landscape.

However, Paul McGlone, principal consultant at Aon Hewitt, said that while the idea could be practical with defined contribution (DC) schemes, it was harder when considering defined benefit (DB) schemes - especially if the individual schemes did not share a common sponsor.

He explained that, with DC schemes, the question of scheme funding was not an issue - a problem that remained when merging DB schemes.

"As soon as you move into the DB world, separation of how your schemes are run really means separation in the whole funding regime," he said.

McGlone added: "Even if you had schemes with identical funding positions, you would still have potential obstacles: If you bring in schemes with separate sponsors, they wouldn't want to take a hit if other members live to be 110."

He explained that further obstacles facing such action was the matter of cost, with sponsors unlikely to consider paying the charges when there was no financial benefit visible to them.

Another potential approach would be to merge the schemes so they are deemed a single entity under law, but maintaining separate funds.

However, he admitted this would then rule out most of the benefits of scale.

"You still need accounts to be kept separate, you need investments to be kept separate to some extent, you need valuations to be done separately," he said. "You can use common managers, but you still need to separate assets."

Conceding that there were potential upsides, he said merged schemes would be able to pool assets, allowing them to access new asset classes - such as alternatives - that may have previously been out of bounds due to asset managers' minimum asset sizes.

"You can invest as a combined scheme, even if you then need to notionally divide it up between the different sections," he said, adding that lower management fees would also be a potential outcome of such mergers, as well as only appointing a single company as auditor.

"There are absolutely some economies, but it doesn't solve all problems - there are still substantial issues," he said.

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