US conglomerate Honeywell has gone ahead with proposals to merge three of its UK defined benefit schemes on a sectionalised basis, in a bid to lower costs and streamline governance.

Mergers enable trustees and employers with multiple DB schemes to benefit from economies of scale, and have become increasingly popular in recent years.

Rosalind Connor notes the importance of funding levels as a key first consideration before merging defined benefit schemes. She commented: “If you’re a better funded scheme and you’re fully merging with a less well-funded scheme, then you have to have a good reason to do that – because otherwise you are just reducing the funding level for your members.

“If your funding isn’t similar, you’ve got to either sit there and think, what is it you can give those trustees – what can make those trustees comfortable – and you may not have something to offer them, and if you can’t do that, the only kind of merger you’re going to end up doing is a sectionalised one.”

Rosalind further added that if one scheme is asked to accept another’s trust deed and rules, trustees also need to consider whether they lose any of their previous powers. “You might find that one scheme has a lot of discretion in the hands of the trustees – maybe the discretion about whether expenses are paid out of the scheme or directly by the employer, maybe discretion about increases to benefits, and the other scheme doesn’t.”

She concluded that it is quite common to carry out a ‘balance of powers’ analysis before agreeing to a scheme merger: “I’ve seen people look to amend the powers of the receiving scheme.”

Read Rosalind’s comments in Pensions Expert.