Momentum is building for a ‘master trust’ solution to the NZ defined benefit (DB) pension legacy problem that could ultimately shelter almost 40 schemes with current estimated assets of more than $520 million under a single administrative and governance umbrella.
Chapman Tripp consultant, Mike Woodbury, said the DB master trust concept, first floated in a paper he prepared for the Financial Services Council (FSC) last year, had received an encouraging amount of support from scheme sponsors and trustees.
“I’ve received more indicative support than anticipated from employers around the concept of [DB] scheme amalgamation,” Woodbury said, “even from one or two of the larger schemes.”
While almost all NZ employer-based retirement schemes offering guaranteed pensions closed to new members in the 1990s, the sector still houses 40 middling to small DB funds (including some in ‘hybrid’ vehicles) that remain stuck in a legislative limbo.
“Many sponsors of those legacy DB schemes and sections would wind them up if practicable, but currently there are no reliably workable alternatives to leaving them in operation,” Woodbury says in the FSC paper.
In practice, most DB funds (or sections in hybrid offerings) require the unanimous approval of members to wind up – a feat achieved by some tiny NZ schemes but problematic for the majority – while the lack of annuity providers here closes one exit strategy that has proven popular for offshore employers looking to transfer pension liabilities.
Woodbury said a few DB funds have also been able to close on the back of lump-sum pay-out provisions in scheme rules.
According to statistics compiled for the FSC study, the NZ DB sector includes about 22 small schemes (assets below $20 million) managing a collective $151 million with eight medium-sized funds ($20 million to $100 million) looking after almost $373 million in total.
The report also identified 10 hybrid schemes, which include some element of DB pensions among other member accumulation options, that could be candidates for the proposed master trust.
A further 10 or so bigger DB schemes ($100 million plus in assets) likely have enough scale to continue as stand-alone operations outside the scope of the proposed master trust universe.
Woodbury said while the master trust would have obvious appeal to smaller DB schemes looking to reduce operating costs (of an average $128,000 per year excluding investment expenses), a couple of larger employer funds have also expressed interest.
“There is merit in consolidation even for large DB schemes,” he said. “Most employers are attracted to the outsourced governance relief the master trust would offer. Some larger scheme also recognise they are essentially in wind-down mode and will become smaller in time [as pensioners die off].”
Under the proposed model, the master trust would centralise disparate employer fund governance bodies into a single board of trustees and a unified administration system.
The master trust would have responsibility for approving investment managers while offering other shared services including actuarial, legal and auditing, the FSC paper says.
However, underlying employers would retain separate responsibilities including setting an appropriate asset allocation for their respective members.
“Employers would likely still have to work with investment consultants and actuaries on issues such as strategic asset allocation,” Woodbury said.
If successful, a DB master trust could bring considerable efficiencies to a sector looking for ways to resolve long-standing legacy issues.
“Up-front analysis may thus be needed in order to confirm reliably that the potential cost savings will outweigh the projected transition costs, though we would expect that in most cases significant savings would accrue over time,” the FSC paper says.
But the mooted DB master trust would require legislative and regulatory tweaks involving both the Inland Revenue Department and the Financial Markets Authority to go ahead, Woodbury said.
He said employer participants would be responsible for selecting service providers should the concept reach take-off stage.
Collectively, the 30 pure-breed sub $100 million DB schemes in NZ represent more than 1,400 pensioners and 330 still-employed members.