Consolidation will affect your pension scheme in significant and unpredictable ways. How can you stay ahead?
Change in pensions is a constant but the current drive to consolidation is extraordinary in impact, and inexorable. It will affect pretty much all schemes, and in unpredictable and potentially significant ways.
This drive is a function of market forces, but mainly government, where, it seems, big is beautiful. Perceived dis-economies will not be tolerated. It's keen to see more support for private, domestic investment and sees scale as a facilitator to address the gap
We expect these forces to impact the running of almost all schemes. We describe the consequences of market consolidation, as it might affect yours. These impacts will likely be uneven, but in many cases, significant. Do you wish to make things happen, watch things happen or have things happen to you?
It's always better to understand exposures and have an action plan. We describe the forces, and potential impacts below. We also suggest potential responses to help you manage what we perceive as escalating risks.
THE PENSIONS LANDSCAPE, MARKET FORCES AND GOVERNMENT 'NUDGES'
The corporate DB market is being most impacted by market forces. Better funding security, and sponsors fed up with endless regulatory barrages and market shocks, are seeking an honourable exit. The truth is, CEOs and CFOs want to run their businesses and avoid non-core pension risk and cost. For them, opportunity knocks. More broadly though, for providers and pension teams, strategies are simpler and the asset base shrinking.
On DC, the government is making aggressive moves against sub-scale schemes, by mandating benchmarking alongside regulatory intervention. The drive is clear - fewer schemes with greater mass, reducing costs, and able to invest in private assets, including the UK.
On the LGPS, the government perceives benefits in fewer pools with markedly larger average asset bases, with expanded (shared?) in-house capability. The nudge towards investing in private assets (especially domestic) could become more than a nudge, even mandated
PENSION MARKET IMPACTS AND HOW THIS FLOWS THROUGH TO YOUR SCHEME
To be clear, we see only gradual shift in the investment strategies used by schemes, on asset prices, or whatever. This blog is not, at least in the first instance, about financial markets.
Instead, we see two significant impacts on the running of schemes, which flow through to governance. Here we mean the decisions you'll be faced with, the resources you'll call on, and the actions you take to manage through this period.
The first impact concerns how you manage strategic shift. By this we mean re-setting your 'mission' such that it likely requires revised governance arrangements to give you the best chance of success.
In corporate DB, this might be seeking near term settlement, or running on, at least for a while, perhaps for enhancing scheme benefits, paying for a DC section or extracting surplus. It might mean streamlining existing arrangements (eg the role of the Board/Investment Committee/Executive), perhaps moving to a Sole Corporate Trustee, or to some form of fiduciary fund management.
In DC, it will likely mean greater (short term) focus on performance and cost, or on transition to a bigger, commercial provider, such as a Master Trust. We expect the pressure to consolidate to be high and this to have more 'presence' in board and committee meetings.
In the LGPS, consolidation will only come with grand scale organising, with project management on an industrial scale. These are massive shifts, not unlike corporate M&A among asset management firms.
Turning to the second big impact.
THE IMPACT OF MARKET FORCES ON THE PROVIDER MARKET
No matter where we look, we just see too many providers. Whether that's advisers, asset managers, platforms, master trusts, even trustee firms, whatever. Truly, how many investment consultants do you need to advise on cash flow matching, or the merits of the buy-out market. How many corporates will choose, or their schemes (both DB and DC) have the scale and governance to 'run on'? How many core bond managers does the market need when post gilts crisis the sensible move is to pass assets to the LDI provider. And in alternatives, surely large, cost-conscious asset pools will evolve DIY capabilities.
We've recently seen firms merge (Cardano/Mercer), attempt past mergers (Aon/WTW), platform consolidation (myriad), and Scottish Widows sell their annuity book (to Rothesay).
We also see fund managers and advisors pivoting towards wealth, insurance, and private markets. Whether this pivot succeeds remains to be seen - in many cases these forces will, of themselves, be the catalyst for more M&A activity.
There simply isn't enough business to go around, these services will, we think, look very different in five years' time. So, who are your key providers and what will you do in (say) a takeover or merger situation? There's bound to be disruption at the scheme level.
Neither do we discount churn to in-house pension executive team resource, quite possible as roles become (eventually) redundant, or staff seek to move on/retire.
WHAT TO DO? WE SUGGEST THE FOLLOWING: -
With Impact 1 – The Change of Strategic Intent:
Be clear on options, choose what's right for your scheme, see it through (both strategic objectives, and BAU resourcing)
Re-order governance - perhaps with different sub-committees/working groups; and project resourcing
Bring in temporary specialist resource, this could be at trustee/NED, or exec level
Put in resource retention or contingency. Consider out-sourcing non-core activities
With Impact 2 – The Risk of Disruption to a Key Service Provider (or your in-house team):
Be clear on which providers are truly core. Assess risks of service disruption
Have a Plan B, especially for heavy reliance/high risk providers
If a provider does change (e.g. M&A), invoke appropriate governance response
May be a bit like a cyber or business continuity event
Invoke subsequent oversight (at least until the situation is deemed 'green’
WHY USE AVIDA?
Avida's core capability is helping pension schemes manage change, especially to improve results. Avida is supporting several pension funds through structural change arising from consolidation, arising from internal and external forces. We are also helping pension schemes assess risks and manage impacts arising from exposure to key service providers.
