Big is beautiful - Will consolidation be successful?

For several years there has been a growing trend for bringing organisations together and replacing a number of smaller units with a larger ones. This, for the purposes of greater efficiency and to achieve economies of scale.

We have seen it in business with mergers and acquisitions in the City, insurance companies, and law firms and so on. A good example would be the NHS - where we have seen the growth of the big hospital trusts and the development of group GP surgeries. Many government departments combine with a view to providing more targeted service and following the latest boundary commission changes - MPs’ constituencies are to be bigger.

I am not sure that everyone is convinced that the concept of big is beautiful is necessarily a good one, but we are all increasingly having to accept it as the norm.

On this theme, one of the buzz words across the pensions industry at the moment is ‘consolidation’. In different contexts this takes different forms. Essentially it’s about trying to achieve better results/performance by avoiding overlaps and taking advantage of the benefits of scale. This is a very hot topic which enthuses some and dismays others. Let me give you two examples:

Firstly, as I write this blog the House of Lords is scrutinising a Bill that brings together the combined forces of the Money Advice Service, Pensions Wise and the Pensions Advisory Service into a new Single Guidance Body. The exact modus operandi has yet to be fully developed, but it is believed it will be able to deliver a more joined-up service to those who need it.

"There are plenty of questions which publicly, don’t appear to have answers."

I hope they are right. My experience with the Pensions Advisory Service is of a small organisation which punches well above its weight - regularly receiving plaudits from the public for the quality of the service it delivers. The contrast with Money Advice Service, both in terms of size and overall reputation, is marked but how they will fuse together is far from clear. Also, who will be doing the face-to-face stuff which currently, Citizen’s Advice does as part of Pensions Wise and, where does the army of volunteer advisers that the Pension Advisory Service use fit in? Will the dispute resolution activities that the volunteers predominately deal with, be part of the new service at all – or will they be hived off into the back office of the Pensions Ombudsman? There are plenty of questions which publicly, don’t appear to have answers.

Secondly, the issue where consolidation is featuring, relates to the viability of the 6,000 or so defined benefit schemes - many of which are quite small. It is thought these could gain better value, by pooling their resources or merging some or all of their functions together. We had a Green Paper before the general election and have been promised a White one in the winter.

I have little doubt economies of scale could be achieved in this area.  Experience with the Local Government Pensions Scheme shows scope for much bigger investment returns that pooling can produce. Also combining administrative services saves money and a larger scheme can usually negotiate reductions on fees and charges with their professional advisers.  But – and it may be a big but – many trustees will undoubtedly be reluctant to agree (unless they are forced) to go down this particular route. Trustees take pride in ‘running their own show’ and are not especially enamoured at being involved in multi-employer type schemes which historically, can experience problems arising from the structure and formation they have adopted.

Both in relation to the new Single Guidance body and DB pensions, it will be interesting to see whether consolidation proves to be successful and if in the final analysis, the industry and pension consumer are in a better place as a result. The clock is ticking on both counts but it may be some time before we find out for sure.

This blog was first published on Money Marketing.