Mercer launches DB master trust as demand for consolidation increases

Mercer’s DB master trust is the evolved form of the Federated Pension Plan, which has accrued £260m of assets and 73 sponsoring employers since it was established by Jardine Lloyd Thompson.

Andrew Ward, Mercer’s UK head of risk transfer and journey planning, noted that by building on the strong base of the scheme and adding the expertise and scale offered by the company, the “master trust provides a smart solution for private sector clients looking to manage legacy DB liabilities”.

Independent Trustee Services and PTL have been selected as professional trustees, and will work alongside Pan Trustees, which is continuing in its role having been trustee of the FFP for more than 15 years.

There is no doubt that, putting it bluntly, I think bigger is best. Consolidation is something I would like to do very robustly

Guy Opperman, pensions minister

Under its new master trust, Mercer will provide a range of services, including investment and fiduciary management, scheme management and administration, actuarial services and independent professional trusteeship. The employer remains ultimately responsible for funding the scheme, however.

Explaining the move, Benoit Hudon, leader of Mercer’s wealth business in the UK, argued that “managing employee pension schemes has become increasingly complex and many organisations suffer from time or cost constraints”.

He added: “These challenges are particularly acute in the case of smaller or mid-sized legacy DB arrangements, where dedicated internal expertise is often lacking and access to best-in-class capabilities can prove expensive.”

In an attempt to solve this problem, Mr Hudon said the consultancy’s master trust will offer clients “a simple, off-the-shelf solution that brings the best of Mercer’s scale and capabilities to help potentially reduce fees and improve outcomes”. He added that it uses the buying power of its fiduciary management platform, “with around £250bn of global assets under management, passing these savings back to clients”.

Minister suggests size does matter

Pensions Expert has reported previously on the growing attraction of outsourced models to scheme sponsors, with the prospect of governance being taken on by a professional third party appealing to those employers desirous of the efficiency that entails.

Such offers are particularly well-suited to sponsors who need to spend more time navigating their businesses through the after-effects of the coronavirus pandemic, and who have concluded that managing their own pension scheme is unnecessarily costly, both in time and money.

Mr Opperman is a supporter of a smaller number of well-run schemes in the UK pensions market. He told a Society of Pension Professionals webinar on Tuesday that “bigger is best”, and that he expected to see considerable consolidation in the years ahead.

The Department for Work and Pensions recently proposed new rules that require small defined contribution schemes prove their value to members, or else find themselves being compelled to wind up or consolidate.

Mr Opperman suggested at the webinar that this move represented “the appropriate way to nudge consolidation”, adding that he had been dissuaded by “wiser heads” in the DWP from more dramatic intervention. “Size matters going forward,” he said. 

“I accept there are isolated exceptions. I'm not saying that everything’s got to be this size or whatever, and there are clearly reasons why certain schemes should remain discrete and smaller.

“But there is no doubt that, putting it bluntly, I think bigger is best. Consolidation is something I would like to do very robustly.” 

Covid-19 proved superfunds’ place

Asked about the place of superfunds in the new economic environment, Mr Opperman said: “If there was any doubt about the need for superfunds pre-Covid, there is no doubt that Covid rammed home that superfunds were a potentially very useful weapon for many schemes going forward.”

Despite being supported by the DWP, not least as a tool for scheme consolidation, the inclusion of superfunds in the pension schemes bill was still not a priority, with the minister saying that “you have to choose your favourite children” when it comes to bills of this size. He said his priorities had been DB reforms, collective DC schemes and the dashboard.

“I start from the basis: why wouldn't you want to do superfunds and have an alternative product at your disposal? There is no question to me that they are a way forward for certain organisations,” he said.

However, superfunds “putting it bluntly, weren’t ready” at the time of the consultation, and Mr Opperman cautioned that “the superfunds’ final statute is a substantial piece of work. It’s certainly a 50-clause bill, probably closer to 100”.

Despite this, he said “the market is showing very clearly that there is great appetite for superfunds, and I suspect that market will increase massively”.

Research published on Monday by LCP appears to support Mr Opperman’s prediction. LCP’s report suggested that, should the superfund industry reach £1bn in the next 12 months, a rapid expansion to £5bn annual volume by 2023 could be a realistic target.

The report further urged scheme sponsors to take a more proactive role in setting pension scheme strategy, not least in light of the impending arrival of superfunds and the closer proximity of many schemes to buyout.

“With the significant headwinds from Covid-19, and fresh regulatory impetus, [superfunds] are emerging as an exciting new option that may appeal to many sponsors,” the report stated.

Richard Williams, director of policy and communications at Clara-Pensions, told Pensions Expert:“Consolidation offers an opportunity for trustees, sponsors and members where insured buyout is unobtainable in the foreseeable future.

“The Pensions Regulator’s guidance around an interim regime for consolidators has helped those considering the right option for their scheme to think about consolidators like Clara, particularly given the current economic picture.

“We are preparing for our first transactions while continuing to work with the regulator to complete the assessment process,” Mr Williams continued.

“We see this as part of a bigger trend among trustees and sponsors to rethink their endgame and consider the full range of options available to them.”