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Risk settlement is dominating headlines for defined benefit pension schemes. But even with a more benign funding landscape, it’s not an option for most schemes just yet. That means efficient management must be top of the agenda. Operational consolidators have practical answers, available now, explains Andrew Goddard, Partner at Isio.

What do we do about defined benefit pension schemes? For many scheme sponsors, their CFOs, and trustees, this has been a thorny question for decades. Almost all schemes are closed to new members, a trend that kicked off in earnest around the turn of the millennium; three-quarters are now closed to future accrual. The DB world is dominated by the challenges faced by legacy schemes navigating their way through an ever-changing regulatory landscape.

Financially, the picture has improved in the past couple of years as gilt yields have risen. For some DB schemes buyout, or “risk settlement”, has become an attractive and achievable aspiration. The number of insurers taking schemes on has grown, enabling more CFOs to resolve what might otherwise have been a chronic headache.

But there are still thousands of schemes that require sponsors to remain heavily involved for the time being. At the same time, the expectations on trustee boards have increased – a burden that looks only likely to increase in the future.

That’s why operational consolidation should be a serious consideration for many schemes.

Operational consolidation is a simple concept. It involves a pensions service provider – such as Isio – running DB schemes collectively, bringing them all up to best-in-class levels of efficiency and service. And for those schemes that require it, there are ready-made governance partnerships to deliver professional trustee support.

IT offers a good analogy. Many businesses now host their servers in third-party datacentres, rather than on their own premises. The specialists are experts in power, cooling and security, so they’re better able to guarantee uptime and service quality. It’s a controlled cost and users get a better experience – but the companies still own the hosted applications and data.

Operational consolidation for pensions works in a similar way: the sponsor is still ultimately in control, but supported by best-in-class processes that serve members and other stakeholders more efficiently. That’s particularly important for schemes where membership numbers are falling and operational costs are becoming a larger slice of the pie.

Schemes gain on two fronts. They benefit when consolidation brings economies of scale and efficient processes; and they win from having full-time, continuous governance structures that lead to better decisions for the scheme.

That means whether a scheme is remaining long-term with its sponsor, or opting for a risk settlement deal, decision-makers can deliver the best outcome for sponsor and members with the least friction.

Beyond superfunds

Much of the current market chatter is about high-profile “financial consolidators” – superfunds such as Clara, where employers pay a premium and walk away from their scheme. This form of consolidation was covered in the 2023 Mansion House reforms, for example. But there’s very little experience of these arrangements working in practice yet; Clara has agreed one deal so far.

Meanwhile, our real-world experience of onboarding more than 75 schemes onto our operational consolidation platforms has shown it’s an effective and reliable way for sponsors to lower costs and improve control. It can also be a bridge to buyout: we’ve bought out a steady stream of our consolidator clients over the last few years. Surveys suggest that’s the ultimate target for around 75% of schemes (with 40% keen to secure a deal within five years). Insurers want to see operational rigour and organisational clarity in any scheme they’ll consider seriously – and we have shown how operational consolidation can quickly deliver results on those fronts.

Whether a buyout deal is possible or not, stakeholders need ongoing advice on investments, risk, and managing liabilities. But as technology evolves – and the market creates new approaches to old problems – stakeholders should also keep an eye out for new solutions.  For example, we’ve just added a new investment platform operated by Schroders to our Enplan solution, enhancing its monitoring and LDI capabilities.

Operational consolidation means better-informed decisions, greater clarity on your options, the use of up-to-date technology, and the best advice to guide a scheme through regulatory hurdles and shifting member needs. For sponsor CFOs, it’s about lower cost and greater simplicity – and the opening-up of new options.

Isio’s teams deliver precisely the right combination of expertise, experience and capability, regardless of scheme structure or needs. And they deliver it now. The Government is keen to see smaller schemes aggregated under a national, PPF-based, consolidator. But this is likely to take years to evolve. With Isio you can tailor your level of ‘outsourcing’ to your precise needs – immediately.

The opportunity is better scheme management, stronger governance, and faster decision-making – plus simplicity, delivering lower ongoing costs. Operational consolidation must now be on the agenda, whatever the ultimate destination for your DB scheme.

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Image Andrew Goddard

Partner & Head of Enplan See full profile

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