Merging Schemes by Sectionalisation
Merging Schemes by Sectionalisation
Background
ABC Limited is a company in the construction industry employing c750 people. As a result of various acquisitions, ABC has three separate defined benefit (DB) schemes, all of which have been frozen to future accrual. All current employees are eligible to join the company’s defined contribution arrangements on consistent contribution arrangements.
The three DB schemes covered different sections of the workforce, had different benefit bases and investment arrangements, had separate trustees, had different renewal dates, and were therefore on different valuation and accounting cycles. The cost and management time involved with maintaining these separate schemes was becoming a significant frustration to the company, particularly as each scheme had different circumstances and objectives and the company were required to consider each scheme independently of the others.
Strategic review and conclusions
BBS were asked to review the arrangements and to recommend an approach for the future which would be more cost effective and benefit from any economies of scale that might be available. The company made clear at outset that it was fully committed to each scheme and that its main objective was to make their operation more efficient. Following a due diligence exercise to establish the facts, data and documentation in relation to each scheme, the following strategic conclusions were reached:
· The company would create one Group scheme, with ABC Limited as the Principal Employer, which would be set up on a sectionalised basis with each of the existing schemes transferring its assets and liabilities into its own section of the scheme.
· Following a detailed legal review of the documentation of each scheme, the largest of the three schemes was chosen as the vehicle for the sectionalised scheme. This resulted in new definitive documentation, which gave effect to the sectionalisation of the scheme. A balance of power analysis was also carried out so that the powers in the new sectionalised scheme protected the existing powers under all of the schemes, and thereby protected members’ interests. Each set of trustees took their own legal advice on the documentation of the new sectionalised scheme and, following any negotiation required, gave approval to the transfer.
· A fundamental requirement of sectionalisation is that the assets and liabilities of each section are kept entirely separate, so that this approach had no effect on the existing funding positions of each scheme (section) and the contribution arrangements for each section could still be considered separately on the merits of that section.
· Under the sectionalised scheme, all three sections had a common set of Trustees and a common renewal date, and action was also taken to harmonise the service providers across all three sections, where these were not already the same. An initial actuarial valuation was carried out for the scheme as a whole, and for each section, with common actuarial assumptions, a common assessment of employer covenant, and one negotiation between the trustees and the company. Going forwards, the valuation cycle for each section was aligned.
· The Trustees took separate investment strategy advice and, whilst each of the sections pursued a different asset allocation strategy reflecting their specific liability profile, common investment managers were appointed across the three sections. This enabled the trustees and the company to consider investment issues across all three sections, whilst still having the flexibility to adopt different approaches within each section.
· Once the sectionalised scheme had been established and all assets and liabilities had been transferred into it, the remaining two schemes were wound-up.
How did BBS help?
BBS carried out the original strategic review and gave the company a clear recommendation on how to proceed. Once agreed, BBS managed the sectionalisation project against a budget and timetable clearly established at outset, and coordinated the legal and other advisers in the various stages of the advice throughout the project. BBS also drafted all the communication materials and conducted member seminars to ensure that members understood the restructured arrangements.
The project took around nine months to complete and throughout the process BBS monitored the various costs incurred ensuring that the project was delivered on time and on budget.
Part of the original strategic review was a cost/benefit analysis of sectionalisation. The cost savings that were expected to be achieved by creating a sectionalised scheme, e.g. due to the need to carry out only one, albeit larger, actuarial valuation, produce only one, albeit larger, report and accounts etc., were assessed with the conclusion that the total cost of the sectionalisation project was expected to be recovered by cost savings within three years. The not inconsiderable savings in management time and effort were in addition!
