Standardization of U.K. defined benefit participants' rights could lead to major consolidation in the defined benefit sector, the U.K.'s Association of Consulting Actuaries and Royal London said in a recent research paper.
The paper, which was published Monday, said such standardization could cut pension funds' cost up to 50%, make it easy for participants to transfer from one arrangement to another and ultimately remove barriers to consolidation.
"Defined benefit pension rights have built up in a piecemeal way over a period of decades. This makes them expensive to administer and complex for members to understand," said Jenny Condron, chairwoman of the ACA, in a news release. "Converting DB rights to a standard structure could yield huge savings and be to the benefit of schemes, employers and members alike."
The paper — "Simplifying pension benefits — is it time for Pensions Pound?" — proposed looking at a total pension benefit figure with a dozen different elements, each of which adheres to different rules, to find common elements that would help standardize participants' benefits. The paper also suggested the creation of a "pension pound" in which any individual's pension rights could be converted to standardized defined benefit rights, common for all U.K. pension plans.
Standardizing DB benefits could allow participants to understand their benefits better and build in more flexibility such as switching between pension plans, the paper said.
The simplification would improve the governance of the pension funds by focusing resources on participant engagement and deficit reduction, rather than on "higher-than-necessary" administration and related costs for legacy arrangements, the paper said.
However, the paper said simplification does not mean a reduction in the expected value of participants' benefits, but rather a way for future pension legislation to allow them to be reshaped.
