The Financial Services Council has today released its initial report outlining the challenge to update the permitted operating model for defined benefit (DB) workplace savings schemes by enabling them to consolidate, thereby benefiting both members and employer sponsors through improved cost-effectiveness and simpler administration.
“Despite many DB schemes being exceedingly small and most now having been closed to new members for at least a generation, there remain over 50 registered DB schemes in New Zealand,” FSC Chief Executive Richard Klipin says.
“Our report outlines that there is a persuasive case to begin removing the impediments to DB schemes being updated and improved via consolidation, using a ‘segregated employer plans, one scheme’ consolidation structure akin to the master trusts that have long been available to defined contribution (DC) schemes. This will necessitate some change to the legislative and regulatory framework to update the way DB schemes can be administered and managed.”
The FSC report found that as of August 2023 the DB schemes which might materially benefit from a workable consolidation solution included:
22 schemes with assets below $20 million (collectively with $151 million in assets, 591 pensioners and 73 employee members);
another 8 schemes with assets below $100 million (collectively with $373 million in assets, 835 pensioners and 257 employee members); and
10 “hybrid” DC and DB schemes with small DB sections which had collectively around 380 pensioners and just 35 employee members.
Initial (and informal) feedback on a draft of the report has indicated that a consolidation solution would likely also appeal to the sponsors of some larger DB schemes.
“The reality of the current situation is that many of these legacy DB schemes are inappropriately small but are forced (due to the annuities purchase requirement typically triggered on a wind-up, and the absence of a functioning annuities market in New Zealand) to continue operating as stand-alone schemes until a workable scheme consolidation solution is made available,” Richard Klipin says.
The FSC report has looked at this issue and assessed what has happened in other markets.
It makes recommendations that there is a case for consolidation. “There are many small funds, they need a better structure, and the costs and complications involved in ensuring they meet their regulatory obligations are excessive relative to their size.”
The FSC report proposes changes that would require an amendment to the Income Tax Act 2007 and exemptions from the Financial Markets Conduct Act 2013 (though it finds that certain other regulatory settings impacting DB schemes are already fit for purpose).
The proposed consolidation model draws heavily on the United Kingdom’s “ring-fencing” model, of which key features are:
a single (professional) trustee board governing the whole consolidated scheme; and
shared administration as well as actuarial, legal, audit and investment management providers; but
the separation (or ring-fencing) of the assets and liabilities of each employer’s own plan.
This initial report focused on the potential cost reduction and administrative simplification benefits of a possible DB scheme consolidation solution.
“If the FSC membership show an appetite to continue this work, then the next stage is engagement with policymakers and regulators to undertake more technical work on what the enabling legislative and regulatory framework would look like,” Richard Klipin says.
“The focus of the FSC is to grow the financial confidence and wellbeing of New Zealanders and this issue goes to the heart of ensuring that our entire system is working well to ensure Kiwis have a dignified retirement.”