Overcoming corporate challenges with DB master trusts

We know that DB schemes and their employers are busy. Many are trying to access the buy-in market because of improved funding, but the regulatory burden keeps increasing with the new code of practice, new funding and investment requirements, GMP (Guaranteed Minimum Pension) Equalisation, legal changes (s37 case, LTA abolition etc.)

There’s also pressure to consolidate – particularly for smaller schemes. And of course managing and controlling costs is a concern; but might government consultation on sharing surplus unlock value for employers?

We’re going to explore some of these themes in this blog and explain how a master trust like Citrus can provide solutions.

The 3 Challenges

Endgame Planning

What are the current challenges for schemes (particularly smaller schemes) in endgame planning?

While we recognise some schemes will wish to consider run-on, for many smaller schemes in particular, buy-out will still be the most likely endgame. So what are the key challenges accessing the insurer market?

• Insurers who are actively taking on smaller schemes are limited, with less than a handful working with the really small schemes (under £20m). This reflects the relatively high fixed costs for insurers in carrying out quotes and implementing for smaller scheme sizes. Additionally, with typically a single round of quotes, and potentially from only one firm, it can be a challenge to get a competitive price.
• At Citrus we therefore focus on making every scheme as attractive as possible, with good data, investments that are insurer ready (no illiquids), good governance and the ability to move swiftly and efficiently through a transaction. Once an insurer is selected, using pre-agreed standard terms can again reduce cost but also provide terms which would also be better than a small scheme could negotiate themselves.
• Finally, by grouping schemes into cohorts for the insurers (class of 2024, 2025 etc), this enables future planning for employers, the insurers and a more attractive proposition than taking individual small schemes one at a time. It also ensures any pre-work required for those schemes can be done efficiently.

In the current market environment, moving to an insurer is more competitive than it has been in a long time. Making sure you are well prepared, as attractive as possible, and can deliver an efficient process, is key to getting competitive terms – which are still available for those who look for them. However, if buy-out is not your endgame, having the support to run-on the scheme and efficiently manage the ongoing challenges will become even more important.

Cost Control

How does Citrus help employers in managing their pension costs?

Everyone in pensions knows GMPe is an expensive exercise. Trustees and employers might see the cost of completing this exercise as delivering little benefit to members. With GMPe there is no option but to do it, all schemes with GMP need to. However, with the approach that the Citrus plan has taken for GMPe (as well as other projects of this scale) it does allow us to leverage scale and efficiencies and ultimately minimise costs.

• We tackle this as one large project for those sections in scope for GMPe rather than as individual projects for each section.
• This means one set of advice prepared by advisers, and one meeting to discuss the project and scheme-specific steps, rather than 35 separate advice papers and meetings. That drives some big savings through Citrus.
• Ultimately employers benefit from all of this as some of the fixed costs are shared and spread. GMPe is a great example of how Citrus can leverage the economies of scale to deliver cost savings, and this is done across all areas the scheme delivers on e.g. valuations, investment advice. So lots of cost savings generated and passed back to employers.

By considering projects in this way; leveraging the use of professional trustees, the scale of advisers and use of technology, cost savings can be driven across all aspects of a scheme’s journey with Citrus.

Governance and compliance requirements

The governance requirements associated with DB schemes can feel overwhelming. What is the Citrus approach?

• The Trustee, working with the advisers, agrees a framework for delivery, discussing any scheme-specific requirements and how to drive efficiencies alongside a tailored approach and outcome. This applies to all aspects, from investment reviews and the actuarial valuation through to General Code.
• This approach is then reviewed by the employer representatives, following which there may be further discussions with each individual employer as helpful. This enables oversight of each step without burdening individual employers, unless it is beneficial to do so.
• On a regular basis newsletters are issued, as well as an employers meeting each year to enable wider discussions, updates and sharing of information. Ongoing communication, including direct with the Trustee, ensures there is always the right level of dialogue – reducing the burden on the employer without leaving them in the dark.

Taking a pragmatic and proportionate approach, driving efficiencies, yet with a level of tailoring where needed, enables each scheme within Citrus to benefit from best practice governance and compliance without the burden of time or cost this can traditionally place on employers.

You can watch our webinar on overcoming corporate challenges where we go into more details of the three key challenges addressed here. If you have any questions or would like further information please do get in touch.

This blog is general in nature, it does not provide a definitive analysis of the subject matter covered and may be subject to change. It is not specific to the circumstances of any particular employer or pension scheme. The information contained herein is general in nature, not to be construed as advice and should not be considered a substitute for specific advice in relation to individual circumstances. Where the subject of this blog refers to legal issues please note that Citrus Pensions is not legally qualified to give legal opinions therefore you may wish to obtain legal advice. Citrus Pensions accepts no liability for errors or omissions.