The Nuclear Decommissioning Authority is close to recouping the £1m it spent merging two schemes into the Combined Nuclear Pension Plan in a bid to save on administration and advisory costs.
The assets and liabilities of the GPS Pension Scheme and the Nirex Pension Scheme were transferred to the £1.3bn CNPP in April last year, as it looked to save £500,000 annually.
If you start playing with pots of money then you have funding issues
In addition to cutting costs, the NDA also wanted to achieve greater purchasing power and economies of scale through merging schemes, according to pensions operation manager Steve Hayton.
However the five sections within the GPS scheme’s defined benefit and defined contribution structures have remained segregated after the merger.
“If you start playing with pots of money then you have funding issues, so the trustees would be concerned if the funding position of the scheme changed,” said Hayton.
Keeping the scheme’s sections separate also meant no additional employer contributions were required because the sponsoring employer of each section remains the same. There have also been no changes to members' benefits.
Funding implications
Differences in funding levels may mean a scheme with a stronger funding position will want protection either in the form of additional employer contributions or ringfencing.
This could mean the merger is unwound within a certain time period if the employer becomes unstable, said Colin Richardson, senior corporate consulting actuary at Buck Consultants.
He added: “Trustees will decide whether there needs to be a new funding assessment.”
Employers considering a scheme merger could work out a payback period. “[They] will have the cost of doing the merger and will have in future lower running costs for running one scheme; now they will need to work back how long it will take to pay back the merger exercise,” said Richardson.
For this reason mergers are not as beneficial for schemes with a shorter life span, he added.
Charles Cowling, managing director at JLT Employee Benefits, said managers merging schemes with different funding levels had three options:
They can temporarily separate their assets;
Try to accelerate the funding of the scheme that is not as well-funded; or
Slow down the funding of the better-funded scheme.
Cowling said some of the consultancy's clients, who have failed to merge schemes because of a funding gap, have combined other aspects of their governance and investment processes to improve efficiency.
“They’re moving towards having a single trustee that looks at both schemes and having a common investment fund to streamline investments,” he said.
A merged scheme does not have to drastically change its investment strategy, Cowling added, as long as it is consistent with its original philosophy.
