The Pensions Authority in Ireland has launched a consultation on the consolidation of defined benefit (DB) pension funds, looking at whether a master trust market could function well and how it could best be regulated.
The authority pointed out that the master trust market in Ireland has continued to grow as trustees and employers respond to obligations under the IORP II.
However, it highlighted that the master trust sector in Ireland is mostly made up of defined contribution (DC) arrangements, as the nature of DC benefits lends to the pooling of assets of multiple employer schemes, governed by a single trustee board, in a manner that allows for efficiencies and economies of scale.
By contrast, it said that the nature of DB benefits, schemes and regulation is “more complex”. It added that it is important to identify and examine DB-specific risks that could arise in a DB master trust market, should one be facilitated.
The Authority also noted that to date, legislative amendments necessary to regulate DB master trusts have not been introduced, and careful consideration is needed before doing so.
Therefore, the authority is seeking views on a potential model for DB consolidation and the impact of introducing consolidation in the DB sector.
It is also seeking views on how the consolidation would operate and how it should be regulated.
Alistair Byrne, head of retirement strategy at State Street Global Advisors, said it will be “interesting” to see how the industry responds to the potential consolidation of DB schemes.
He said: “Currently, many DB schemes are closed, and the sponsors are focused on efficient management of their scheme on the journey to the ‘end game’ of settling all the member benefits.”
Byrne added that DB master trusts have a potential role to play in the end game journey alongside other approaches such as fiduciary management and insurance buy-ins/buyouts.
He pointed out that, in this situation, a pension fund can benefit from a master trust’s economies of scale in governance, administration, and investment management, as is the case in DC master trusts.
“If consolidation is to go ahead, existing providers of consultancy or administration services may wish to bundle their services for DB schemes in this master trust format,” he continued.
Caroline Rowan, head of retirement consulting at Aon Ireland, believes that efforts to facilitate greater consolidation would provide significant benefits to both employers and scheme members in terms of access to economies of scale, greater investment sophistication, and high-quality member communications.
“Employers would also benefit from the reduced time commitment associated with outsourced trusteeship, as well as the peace of mind associated with knowing the trust will continue to evolve with legislation, compliance requirements and pension reforms,” she said.
According to Rowan, there will likely be an acceleration in consolidation over the coming months, as developments in the risk settlement market, including increased competition and a deferred annuity offering, take shape.
“These moves will allow companies to settle some or all their DB liabilities, while at the same time meeting members’ expectations under the DB plan,” she said.
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