Update on defined benefit schemes consolidation initiative

Update on defined benefit schemes consolidation initiative

In its 2023 Consolidation of Small Defined Benefit Schemes report, the FSC analysed the benefits of a workable solution for consolidating defined benefit pension schemes (and sections) into one or more customised multi-employer schemes (master trusts) each with:

• a single manager
• shared administration and service provision, and
• segregation of each employer plan’s assets and liabilities.

That report was “stage 1” of the potential consolidation initiative and its provisional recommendations met with wide stakeholder support.

This article provides an update on “stage 2”, comprising engagement with (respectively) Inland Revenue on an enabling law change and the Financial Markets Authority (FMA) on appropriate exemption relief.

To recap, consolidation would be achieved by the bulk transfer of all members and assets from the relevant scheme or section into a master trust under section 181 of the Financial Markets Conduct Act 2013 (FMCA), which requires FMA consent to each such transfer.

The “stage 1” report found that consolidation would offer:

• significant cost and time efficiency gains
• mitigation of governance risk, and
• the facilitation of more effective and efficient investment strategies and improved governance.

To enable consolidation to be offered, the Income Tax Act 2007 requires a technical amendment, and any master trust provider would need exemption relief from the FMA.

In this article we summarise progress to date on “stage 2”.

Income Tax Act amendment

The required amendment (an amendment ensuring the continuation of each incoming scheme’s or section’s current tax treatment) has had Inland Revenue’s indicative support since early 2024.

Though this awaits confirmation, we currently anticipate the inclusion of the amendment in the 2025-26 Annual Rates Bill (scheduled for introduction in August 2025 and enactment by March 2026).

Exemption relief

In December 2024, Chapman Tripp wrote on the FSC’s behalf to the FMA Regulatory Policy Team seeking its in-principle support for the following exemption relief for any master trust provider, to help make consolidation practicable:

• enabling the master trust to admit pensioners from other DB schemes
• allowing any employee members to transfer from a DB scheme or section into the master trust without triggering full FMCA disclosure requirements
• enabling the master trust (if it is a restricted scheme) to admit new members from non-associated schemes
• enabling actuarial (and certain annual) reporting to be provided at an employer plan-specific level, and
• for a pensioner-only plan, removing the 3-yearly actuarial review requirement (subject to an annual vested benefits review).

The FMA has responded that:

• it does not have any conceptual objection to granting appropriate exemptions in due course to facilitate a master trust product coming to market in order to consolidate defined benefit schemes, but
• any commercial proponent’s request for particular exemptions (and the FMA’s response to that request) will need specific consideration at the time based on:
  • the details of the specific manager and scheme, and
  • the wider legislative and fact circumstances then applying.

The FMA correspondence also confirms that there are two viable alternative types of consolidation vehicle:

• a repurposed existing (i.e. restricted) defined benefit scheme, or
• a newly established (hence non-restricted) defined benefit scheme.

The FSC’s correspondence with the FMA has in practical terms run its course, and we have thanked the FMA for its constructive engagement. Currently, we anticipate that any further engagement with FMA would be provider-led (and relate to a specific consolidation proposal).

Feel free to contact the FSC Workplace Savings Committee with any queries by emailing Troy Churton troy.churton@fsc.org.nz.