The Pensions Pod S6:E5 – Small Schemes: Navigating Challenges for sub £1m Pension Schemes

Ffion Hughes (00:32)

Thanks Chris. As Chris said, I’m Ffion Hughes from WTW and I’m head of our integrated bundled service 1DB. For those not familiar with 1DB, it’s an integrated advisor and provider solution for DB schemes, giving trustees and members access to our breadth and wealth of knowledge, expertise and technology from across all of WTW to provide a modern and transparent service centred around the member experience.

Chris Brown (00:56)

Yeah, super sounds great and looking forward to discussing what you’re seeing and how that approach can help small schemes. So brilliant to have you on the pod. And, Andy great to have you on the pod too, do you to say a bit about who you are and what you do, please?

Andy Prater (01:12)

Thank you, Chris. Yes, my name is Andy Prater. I’m a Director in Burges Salmon’s Pensions and Lifetime Savings team. I advise both pension scheme trustees and employers across a broad range of pensions issues and in relation to both defined benefits and defined contribution arrangements with scheme asset sizes ranging from the low millions up to over a billion pounds. And Chris, if I may start by saying I really enjoyed my last appearance on the pod way back in season two. So thank you for eventually inviting me back on.

Chris Brown (01:41)

Yes, brilliant. Season six and looking forward to having you on the next episode so that that comment doesn’t happen again. Thanks, Andy, for that. OK, so without further ado, let’s talk about small schemes.

Okay, so Ffion, perhaps the first question to you please, what is the definition of a small scheme?

Ffion Hughes (02:03)

So, schemes under £100 million worth of assets is how the regulator defines it and that’s the terminology we tend to adopt as well. And I think, just to add, for us, our client range goes right down to schemes that are way below the £100 million marker as well and that’s certainly where we’ve seen a growth area this year and that’s why this conversation today is so topical.

Chris Brown (02:31)

Yeah, absolutely. As Andy says, our client base does the same. OK, so I suppose our first question is what particular challenges do those schemes smaller than £100 million in assets, what challenges do they face as opposed to challenges facing the DB universe in general?

Ffion Hughes (02:55)

The challenges they face are around probably having tighter budget, probably having less internal resource to be able to support with pension scheme matters. And they might feel as well sometimes, certainly what we’ve heard is that they maybe have less provider choice. So they kind of don’t have that, know, perhaps access to all of the market. And therefore that’s where we then see, you know, particularly for those smaller schemes, I think they can feel quite pushed to be kind of less important than some of the bigger schemes and therefore their member experience either suffers more and or they can’t progress with some of those projects. So that kind of administration and member experience is certainly that top answer. And I think then again, sort of mentioning those projects there, again, they’re the same things that the bigger schemes all suffer and have to deal with.

But I think you’ve got the other range of areas. You know, still the challenges around, you know, transacting again, which kind of more acute perhaps, or certainly perceived to be more acute, the smaller the schemes are, you know, covenants, different challenges with different size employers. That doesn’t necessarily tie back to size of the scheme. But again, you know, I guess that there may be some, you know, businesses in different scenarios sponsoring these schemes.

So again, think, you know, going back to what I said initially, you know, overall, at the high level, they are the same issues, but I think it’s as you kind of delve into them that the problems and how to solve those problems are slightly different. Yeah.

Chris Brown (04:33)

So same issues, but the response of a small scheme to XYZ issue will be different to one that is £500 million plus, a billion or whatever else. Andy, you were recently involved with an event, some of Ffion’s colleagues from Willis Towers Watson hosted in Bristol, although I know there’s other ones going on around the country. What are your reflections there on the sorts of challenges facing small schemes?

Andy Prater (05:01)

It was real pleasure to host WTW’s Small But Mighty event in Bristol with Ffion’s colleagues earlier in the summer. I think we did have some really interesting discussions on topical issues, issues affecting smaller schemes, horizon gazing generally and end game planning. I think I would agree with everything Ffion just said really, but just to add from a legal perspective, I think I’d say, as Ffion did, everything that affects larger schemes can be more challenging for smaller schemes with fewer resources.

But from my perspective, I think keeping up with a quickly evolving regulatory landscape can be challenging for smaller schemes. We never seem to be too far away from the next pensions or finance bill or there’s a new consultation or some new piece of regulatory guidance. So that I think can be difficult. And I think one topical thing which came up in the summer and which is still relevant now is that whilst the government’s going to legislate to ease the burden in relation to Section 37 compliance following the Virgin Media decision. We’re still expecting the Verity Trustees and Wood judgements later this year, which will be relevant for many schemes in this respect. So there’s still going to be another legal exercise to work through to ensure compliance there. So that’s a couple of thoughts to add, yeah, from a legal perspective.

Chris Brown (06:16)

Yeah, and that section 37 is interesting, isn’t it? Because although there’s a fix in the legislation, I think the industry and the actuarial industry is still working through the approach to applying that fix. So yeah, schemes will have a lot to think through with lawyers and with their actuaries as the fix is settled,  even leaving aside Verity Trustees almost.

Okay, so lots of issues facing small schemes, similar to schemes of all sizes, to costs, admin issues, future regulation, transaction readiness we’ve already mentioned, potentially also a different approach to investment, and Ffion mentioned sponsor covenant, and we’ve talked about governance and response to challenges as well. Let’s focus, well, I’ll see where the conversation takes us, but focus on, Ffion you started by talking about administration and that member experience and sort of the day-to-day. What are you seeing in that market?

Ffion Hughes (07:19)

Yeah, so and I think that’s a really good question. You know, from what the schemes and the trustees and sponsors that we’ve spoken to, you know,  challenges I mentioned before,  maintaining a good level of member service whilst also being able to address the projects. Because, you know, when everybody knows when administration isn’t going well and members aren’t receiving good service, then it takes a lot of time and energy from everybody involved to improve that and that time

is then detracting from some of the project work that’s either required from a regulatory requirement or that’s desired to help you and the scheme progress with their journey and really make a difference to ultimately reaching that end date. And in response to the second part of the question as to what are we doing about it?  I’m really proud to sit here today and say we’re investing in the administration services that we provide and we have been doing for a number of years.

Chris Brown (08:18)

So how should trustees and sponsors approach thinking about different service providers?

Ffion Hughes (08:25)

So, you know, it is, there’s no getting away from the fact the thought of changing administrators, you know, it is daunting. It’s a big project and a big piece of work. But I think, you know, with anything like that, if you go into it with your eyes open in terms of what the process is going to look like and actually, you know, think about what you can gain from going through that process. You know, there’s a lot of opportunity to be had by going through an administration transition.

It’s not just about what, obviously a big part of it is about what the member experience will look like at the other side of the transition. But going through that process is an opportunity to really get into the weeds of the benefit specifications, their administration practices, understanding the data. And for me, the success of the future is all underpinned by having that transparency and knowledge and a plan.

And I think that’s really important. If you know everything about your scheme, whether that’s potentially any limitations or any issues in the data or benefits that are being paid, once you know that, you can find a way of tackling it. We don’t have to do it all at once. And some of those things will be resolved as going through part of a transition. And I think once you know where you stand, then you’re much better equipped for the future.

Andy Prater (09:43)

And Chris, I think from my perspective, again, I agree with all of that. And I think whilst recognising that it’s likely to be a challenging exercise, I would say to trustees, take a step back and think about fiduciary duties as well. So, as you’ll know, they will include but aren’t limited to promoting the proper purposes of the trust, administering the scheme correctly, acting prudently and responsibly and acting in the best interest of beneficiaries. So, for all of those reasons at least and more, it may well be appropriate to look to change your administrator if there are good reasons to do so.

Ffion Hughes (10:17)

Yeah, and our approach as well. One of the things that we kind of differentiate ourselves on when doing an administration transition. So to be clear, people are also transitioning scheme actuary services and actually instead of, we don’t tend to look at it as transitioning administration and transitioning actuarial. You know, you’re transitioning the data and the strategy and it’s looking at it, you know, both kind of combined and everybody is involved in that process which again you know delivers much more value in the future.

Chris Brown (10:50)

And from a legal perspective, when trustees move their service providers, we often get involved with looking at those service provider contracts. And certainly recently I’ve been involved with looking at the transition periods, the handover periods between administrators and how that works and what the outgoing administrator’s duties are and that crosses over and liability split particularly during the transition period as well. So trustees will want to speak with their new administrators about how that will work. So you mentioned there 1DB, Ffion, and how that’s a package solution with actuarial support as well and we can see the benefits of that and also investment support as well.

Ffion Hughes (11:39)

Yeah, yeah, so we can provide kind of all the services, all the service lines or just a couple of the service lines.

Chris Brown (11:48)

And why, I suppose, just thinking of trustees, I can see the benefit of having all of those services from the same provider. Are there any reasons why trustees might think that this option is not right for us or perhaps things that trustees need to think through before they decide that it is right for them?

Ffion Hughes (12:08)

Yeah, so I think on the one hand there is, you know, the approach of wanting best in class and obviously, you know, we are best in class in all of those areas. But also, I think when it comes to changing providers, then, you know, understandably, there is a reservation or concern around loss of knowledge. And so I think, again, it’s kind of balancing the risks for each scheme as to what’s right for them.

Chris Brown (12:18)

I want to pick on a point that you mentioned a little bit earlier Ffion, and you were saying how  thinking about your administration and getting your house in order on administration maybe by swapping providers helps generally, but also helps you prepare for potential endgame solutions and risk transfer transactions. So I wonder if you could unpack that a bit for us. And then Andy, I might come to you to see what you’re seeing, issues cropping up for risk transfer transactions for small schemes in particular. So Ffion, I’ll come to you first, if that’s okay, about the benefits of what you’re seeing and getting your administration on your house in order in advance of a risk transfer transaction.

Ffion Hughes (13:22)

Quite often we see through a number of the transitions that we’ve done, that we’re moving from  or schemes are moving from a manual process to getting their data fully functional on an electronic database and having all of the individual data items that you need to be able to administer those benefits. And I guess you need less data to administer a scheme because you can do additional steps in coming up with quotations, et cetera.

But  for transacting, you obviously need all of those individual items. So again, it kind of comes back to if you understand what you’ve got in terms of data and what you haven’t got, you can come up with a data plan to address any issues that there might be. And you can do that. The scheme can then do that at the pace that’s right for them. And I think quite often, some of the things I’ve heard anecdotally are, you know, when schemes dip in and out of fixing kind of isolated data issues, either that can cost more in the long run because you’re kind of going in repeatedly potentially to look at member records. But also it can, you know, you can come a bit unstuck at the point of actually wanting to transact because there’s more work potentially there to be done than you realise. So I think from the data perspective.

But then you’ve also got the benefits side of things and Andy, you mentioned before,  the benefit specification. And I know you’ve, you know, I know you’ve done a podcast previously in one of your earlier series around, you know, benefit specifications and the importance of that role in, you know, in the future journey of the scheme. And again, it’s about kind of identifying and, you know, having that insight into what the benefits of the scheme are and if there are any  areas of uncertainty because again it’s those areas of uncertainty that will ultimately impact on cost which is not where you want to be both cost in terms of securing the benefits and timelines you know and if timelines stretch out then that’s cost, that’s additional cost for the sponsor so yeah again kind of for me that the big word is transparency and knowledge.

Chris Brown (15:44)

Yeah, thanks, Ffion. That chimes and certainly we see the benefits of trustees getting ready in advance. So we’ll be involved with preparing benefit specifications for a risk transfer transaction and certainly getting your ducks in a row, which is, I think was a phrase we used on that earlier podcast episode, can really help schemes so that they are transaction ready. Andy, what are you seeing at the moment in terms of

small schemes approaching those transactions?

Andy Prater (16:16)

I think generally, Chris, as Ffion sort of said before, we really would encourage all schemes to carry out a benefit specification review early, even if a transaction may be some way off, because if there are issues to work through, it’s better to find out about them early. It may be, for example, that action could be taken against relevant advisors, but more generally, there’s space to seek to resolve issues without the pressure of an impending transaction.

Chris Brown (16:41)

Exactly, it’s better to know if there is something there isn’t there?

Ffion Hughes (16:45)

Just picking up on something you said there Andy, certainly a question I’ve heard before, is it ever too early to get ready for a transaction? Certainly from my benefit and experience of talking with various people across the industry, I think as long as everything is documented, knowing what that end purpose is, then that’s going to put you in a you know, then any work that’s done is really useful. I don’t know if that’s…

Andy Prater (17:19)

I think that’s a really good point. I mean, think it probably comes onto a little bit of the scope of what our work would be generally when looking at benefit specifications. I think it’s a related point and I think approaches can vary, but typically we would expect to start looking at the scheme’s most recent consolidated trust deed and rules as amended. And then we would then see which members those rules don’t apply to. So, typically members who became deferred or pensioner members before those rules came into force.

And then we would compare that against administration practice for those members. So the process in creating the benefit specification originally would be iterative and it will differ between schemes depending on the circumstances. But it may well not be necessary to trace back the entire history of the schemes governing documents when preparing a benefit specification. So I think you’re right. There’s almost, I don’t see it as being a question of doing something too early because you can get something prepared and then if the scheme is amended subsequently, it’s a relatively easy job to just tweak the benefit specification that you’ve got on file at that point.

Chris Brown (18:25)

Yeah, and I think it’s really important that trustees speak with their advisors to really understand the scope of the job that they’re agreeing with their service providers to do. I mean, on an earlier podcast episode in this series, I discussed with Andy, our colleagues,  Richard Pettit and Elena O’Leary, both in the Pensions and Lifetime Savings team here at Burges Salmon about benefit audits.

And on that episode, we discussed the extent to which trustees need to, well, there is no duty on trustees to pick up every stone and go looking for problems. And so I think trustees need to agree with their advisors, the extent and scope of the work they do when they are doing a review, a benefit review, or when they are looking at a benefit specification. Right, so I want to talk about something slightly different now. I want to finish by having a quick look at what you two are both seeing in terms of preparing for a risk transfer solution and what you’re seeing as to how small schemes in particular face a risk transfer project.

Andy Prater (19:34)

Well, Chris, I think whilst I understand this year’s on track to be a record year for the bulk annuity market, I think there have perhaps been fewer really big transactions. So that’s meant that some insurers who typically focus on the larger schemes have been stepping down to do smaller deals. So I think the market is more competitive for small sub £100 million schemes at the moment. I think generally, you know, when trustees are thinking about securing benefits, typically price and the price lock mechanism are often sort of the number one criteria, probably most closely followed now by insurer administration capability. And then I think probably contractual terms at number three. So whilst it’s often been the case or is often stated that there’s no room for negotiation in those terms, I think that’s not necessarily the case. And I think now’s a good time to be in the market for schemes of that size and that there’s more, there’s potentially more negotiating scope.

Chris Brown (20:34)

Yeah, that’s interesting. But also, I think even if an insurer does offer standard terms, it’s very important for trustees to fully understand what they’re signing up to. And of course, Ffion, Burges Salmon work with some of your colleagues at Willis Towers Watson. We’ve done that for a number of years now on a streamlined buy-in proposition. So what that means is, you know, we know those standard terms inside out. We know how to discuss them with insurers. So that’s a real benefit to all schemes, but particularly those that are under £100 million. And two things I just sort of wanted to add that I’ve seen in my recent experience of risk transfer solutions for sub-100 million pound schemes. One is, I think I suppose a number of years back traditionally there would be an aim to ask the insurer to ensure the precise benefit specification in a scheme’s deed and rules, whereas now there is much more of a trend, the employer and trustee are perhaps harmonising, you know, minor ancillary benefits upwards to match an insurer’s proposal and to take advantage of attractive pricing and to see a deal through. So that’s a slight change in approach. And also, I think across the team, we’ve seen transactions where trustees have bought in knowing that the benefits bought in are an imperfect match to the benefits in the scheme, but that they help ensure a lot of the liabilities and they know that they will deal with any difference in a data cleanse phase and pre-buyout.

Ffion Hughes (22:10)

So my main message to your listeners would be, you’ve got options. If you feel that something isn’t right, something isn’t going how you want it to be in your pension scheme and you want it to improve, you’ve got options. The  market is there, we are investing and we’ve won over 10 new schemes this year alone.

And think that demonstrates that there is commitment there in the markets to providing members with a really good service. yeah, don’t sit there thinking that there’s no options and now’s the time to do something about it as well.

Chris Brown (22:52)

Yeah, absolutely. And look, the pension for a member who happens to be in a scheme that is under a hundred million pounds is just as important as the pension for a member who’s in a scheme that happens to be over a billion. So yeah, absolutely. There are options to provide the best for your membership.

Andy Prater (23:14)

Thanks Chris. I mean, I think lots of trustees of smaller schemes probably feel like they’re often firefighting lots of different problems or issues or regulatory developments, but I think notwithstanding that, I would say probably do your best to prepare early for projects. So again, this comes down to probably ensuring that you’ve got an accurate record of the benefits, do that benefit specification, and then that gives you, it should stand you in good stead to see where you are going forwards in relation to the future lifecycle of the scheme.

Chris Brown (23:47)

Yeah, super, I think that’s a really good message and that makes sense to me. Well, it was lovely to have Ffion and Andy on the pod. And I suppose I should say that there’s lots of different issues affecting small schemes that we didn’t get a chance to cover. So there’s more we could discuss around increasing governance burden, the government’s drive for consolidation, investment, small schemes will have a different approach to surplus, might be harder to justify running on. But we hope that was a really helpful discussion about administration challenges and ways that smaller schemes might approach transactions.

So that was another episode of the Burges Salmon Pensions Pod. If you’d like to know more about our Pensions and Lifetime Savings team and how our experts can work with you, then you can contact myself, Chris Brown, or Andy, or any of our team via our website. And as we say every episode, all of our previous episodes are available on Apple, Spotify, our website, or wherever you listen to your podcasts. Don’t forget to subscribe, and thanks for listening.