You run a Defined Benefit (DB or final salary) pension scheme for your employees. It’s expensive, but it rewards long-term employees and as you’ve got to do it anyway, it might as well be a good one. Right?
Actually, you don’t have to run an expensive scheme at all. While every employer, irrespective of size must provide a pension plan – and make contributions – for their staff, there is no legal requirement for it to be a DB plan.
Most DB plans have gone the way of the dinosaur. The vast majority are closed and when there is sufficient money, they are wound up and the responsibility to pay a pension is passed to an insurance company.
For some time, Defined Contribution (DC or money purchase) has been growing slowly –and a lot quicker since the government introduced auto-enrolment in 2012. In 2018, there were 20% more contributions into DC pensions by employees than into DB. So it shows how things have changed.
Why have a dog and bark yourself?
There is no reason this has to be overseen by the employer, either. If you think about it, you probably won’t come up with a single good reason why your business, a manufacturer, should have anything to do with running what is a large financial institution. And you’d be right.
So, why do you? Yes, you have a legal responsibility to ensure that your employees receive the benefits due to them, so having some oversight makes sense. And it is the way it’s always been done.
You’re not alone. Many businesses are looking to keep running their scheme to the point it will start to pay for itself. But very few are confident about being able to manage the risks.
Outsourcing is the answer
If you can’t afford to buy-out the scheme with an insurance policy, there is an alternative. There are consolidation experts who take on the day to day running of a scheme, so why continue to struggle to optimise things in-house when there are outsourcing experts who can do it for you?
And if you have struggled, The Pensions Regulator would far sooner you gave it to someone who knows what they are doing, such as a DB Master Trust. These are multi-employer providers that pool resources in order to deliver considerable economies of scale across investment, administration, legal and actuarial functions all under a governance framework from professional trustees, whilst the individual schemes are ring-fenced from each other outsourcing allows the employer to retain oversight, removes risk and reduce costs.
You will also recover some additional resource when you realise how much time is dedicated to the pension scheme by some of your key staff.
The average FD spends an inordinate amount of time – adding up to weeks a year –managing the DB pension. That’s not even a part of the FD’s day job, so just think of the potential impact on the business if they had an extra day a week to focus on the business.
To find out more about DB pension scheme consolidation visit TPT’s website.
By Paul Longstaff, development manager, TPT Retirement Solutions