Estimated reading time: 8 minutes
There has been plenty of press coverage over the last year or so in relation to the challenges for some current and former employers with participation in Non-Associated Multi-Employer Schemes or (NAMES).
In this blog, Barnett Waddingham and Eversheds Sutherland have worked together, combining our extensive experience to examine some of the main actuarial and legal aspects of non-segregated NAMES from the point of view of the employers who participate in them. In particular, we examine the benefits of membership and the steps employers can take to meet their unique challenges.
In a nutshell, a NAMES is a pension scheme which contains many different employers. They can either be segregated (meaning that each employer is legally separated) or non-segregated (in which case there is no legal separation between each employer’s assets and liabilities). Non-segregated scheme are also known as last man standing.
NAMES are usually large schemes with many, perhaps hundreds or even thousands of employers. Often the employers have no connection to each other, aside from operating in the same general industry or sector. Sometimes, whilst there has been a history of cooperation between employers (reflected in the collaborative structure of the scheme), those employers may now be in competition with one another and increasingly need to operate on more commercial terms.
There are some real advantages of NAMES, as they allow employers to access an arrangement which may otherwise be prohibitively expensive; for example the professional adviser costs are spread across all of the employers allowing even smaller participants to have access to high quality advice. The larger scale of NAMES can also mean that there can be economies of scale and opportunities on the investment strategy, which a smaller arrangement could not access on the same terms.
This blog summarises some of the key considerations, risks and options for employers participating in a NAMES, as well as taking a look at what the future could hold.
Compared to a standalone defined benefit scheme, participation in a NAMES can result in a lack of control and influence for individual participating employers. This is because the trustees of the NAMES scheme will make decisions based on the scheme as a whole and the legal position can be such that employers have little influence.
There will be circumstances where the trustees practically need to apply some form of “one size fits all” approach, notwithstanding that each employer could have their own objectives and views – some common areas are set out below. It is therefore important for employers to find a collaborative way of discussing their interests with one another and creating a consensus that can be put to the trustees.
However, many NAMES are keen to engage with employers in a collaborative way to take on board and address any concerns that participating employers may have. For example, some NAMES have set up employer representative groups / committees to represent the wider employer group and aid their understanding of how the scheme is operated.
As a consequence of the legal structure and the collective nature of NAMES, employers will often lose their ability to influence directly the assumptions used and negotiate the pace of any contributions to the scheme. There may also be cross subsidies, as the NAMES will take into account the collective covenant and interests of all the employers.
However, it may be possible to negotiate allowances for different employers if there is a justifiable reason (for example covenant or different membership characteristics). While this adds a degree of complexity, it can help to address individual employers’ concerns.
Employers are unlikely to influence the investment strategy of the NAMES directly and so will not be able to tailor it to their particular preference. For example, some employers may have a desire for increased investment risks in the hope to minimise future contributions, while others may want to take low-risk approach with a steadier rate of return.
To counter this, many NAMES trustees implement advanced investment strategies to try and ensure an optimal outcome, although matching assets will still be based on the NAMES as a whole rather than an employer’s specific liability profile.
Generally, expenses of the NAMES are set by the trustees following discussion with the employers. As the expenses are met across all of the participating employers, the absolute amounts payable by each employer are likely to be much lower than a standalone defined benefit scheme.
Employers may want to understand more about the underlying expenses and check that the method used to proportionately split the costs between employers is appropriate and there are no material “winners and losers”.
NAMES set up on a non-segregated basis (“last man standing”) are exposed to the risk of orphan liabilities. Orphan liabilities occur where either a) an employer in a NAMES became insolvent and didn’t meet all of its section 75 debt on insolvency; or b) where an employer exited the NAMES and met their debt in full, but the members remain in the scheme (i.e. not having been bought out with an insurer) and events such as market changes or increases in life expectancy mean that the amount that was paid is no longer sufficient to meet the cost of funding their benefits in full.
In both of these situations, the liabilities in respect of the members of the former employer(s) remain in the NAMES and the remaining employers become responsible for them. This means that a small employer with a minor liability could conceivably “inherit” the (potentially significant) orphan liabilities of another employer.
From an actuarial perspective, orphan liabilities will be a more significant concern where the total number of employers is relatively small and there is a concentration of liabilities to a small subset of employers. Of course, the risk depends upon the covenant of the employers in question (and there may be collective risks if they all operate in the same sector), but the risk of a “big number” being added to a small employer is particularly relevant.
Employers may wish to understand the level of any orphan liabilities and how they are allocated under the scheme, in order to ensure they fully understand the position and any associated risks. There are also advantages to being in a last man standing scheme, as an employer’s membership is effectively underwritten by a collection of other employers, which arguably increases the security of benefits.
In common with any employer who operates its own standalone defined benefit pension scheme, employers who participate in a defined benefit NAMES are likely to be mindful of the risks associated with providing such benefits and so should be aware of the options available to them to reduce their exposure, including:
- Reduce exposure to the risks of other employers in the NAMES by transferring to a new segregated section, or some alternative way of creating a ring-fence from the liabilities of the other employers. This may then allow the employer some additional flexibilities in the recovery plan and investment strategy.
- There are a number of legal formalities which would need to be followed to achieve this and it is likely to require a payment to be made to the NAMES. This payment can be large or small and very much depends on the specifics of the NAMES. As a minimum, it will require payment of any share of orphan liabilities due.
- Consider proactive ways of reducing liability risks by considering member option exercises e.g. triviality or transfer value exercises. If such an exercise is successful it could materially reduce the membership and associated liabilities for an employer, including the section 75 debt and ongoing contributions.
- Legal advice will be needed here to support on the Incentives Code and ensuring a well-run exercise.
- Reduce risk exposure by paying discretionary contributions to the NAMES to improve the funding level and reduce the section 75 debt. Depending on the structure of the scheme, any additional contributions may benefit an employer’s liabilities in isolation, or may benefit the NAMES as a whole, so careful consideration is needed before any amount is paid.
- Actively monitoring the situation – this could include tracking the section 75 exit debt and understanding the legal triggers so that you are well placed to activate and pay the debt when the time is right.
Many of the above options require the employer to engage with and work closely with the trustees of the NAMES.
Maintaining a good working relationship with the trustees is something each employer should be looking to achieve, and this will be common with the objectives of the trustees.
Employers should be aware that many NAMES are now taking serious steps in the defined contribution market, providing potentially viable alternatives for some employers. Given the requirements of auto-enrolment and the increasing expectations of the Pensions Regulator for defined contribution pension schemes, employers who do not provide suitable ongoing defined benefit accrual will need to ensure that they have a comprehensive defined contribution offering in place.
Employers that already participate in a defined benefits in a NAMES could look to their existing arrangement for future defined contribution accrual, providing a degree of continuity and comfort that all benefits are being administered under the same roof.
Of course, the issues surrounding past defined benefits in the NAMES will continue and the points above are something which employers will be considering for many years to come.
About the authors
This blog is a combined effort with Tom Meyrick, Senior Associate from Eversheds Sutherland. He has worked closely with Barnett Waddingham's Chris Hawley (biography below) to provide clear insights and to offer training or general information to any employers or trustees involved with NAMES.