Legal considerations for commercial consolidation
30 Jul 2019
With Brexit dominating parliamentary time, authorisation for certain commercial DB consolidators is unlikely to be introduced quickly. While the pensions industry can't do much about Brexit, it is moving forward on consolidation.
Some forms of DB consolidation (e.g. DB master trusts) have already been operating for years, regulated by The Pensions Regulator (TPR) under existing legislation. Under these models, the employer retains its link with the scheme. Can the new Commercial Consolidators which sever the employer link do the same?
The industry and the DWP have accepted that the answer to this is 'yes', despite the lack of authorisation regime (though clearly DWP does want authorisation in this area eventually).
So, is that the end of the legal considerations?
No - indeed, that is just the beginning.
The starting point is whether it is possible for your scheme. Do your scheme rules enable a transfer to a Commercial Consolidator? If not, can you amend the scheme rules and should you?
If it is possible, before deciding to go ahead, you will need to consider what protections there are post-transfer.
When it comes to Commercial Consolidators, the main protection is the capital buffer which will operate differently in each consolidator. The capital buffer replaces the employer covenant to the scheme and is therefore an integral part of working out if transferring to a Commercial Consolidator is beneficial. It’s therefore vital to understand, for example:
- Who has the power to amend the rules relating to the buffer?
- Who is responsible for monitoring whether the test for money being released from the buffer into the scheme or back to investors is met?
- What happens if there is a dispute about whether that test is met?
- Who can claim if funds are paid out when they should not be?
- Are there obligations to build the buffer up again?
You may also need to consider whether there is a legally binding commitment by the Commercial Consolidator to pursue a particular end game, especially if that has influenced the analysis of whether the covenant in the Commercial Consolidator is better than that of the employer.
Trustees are also likely to be concerned about how they are protected if, despite everyone's best intentions and hard work, things do not turn out as expected post-transfer. Trustees should check if they are covered by any indemnification e.g. under their scheme rules.
For trustees, all of this needs to be considered in the context of their fiduciary duties, in particular the duty to act in the best interest of beneficiaries.
Will trustees get comfortable transferring to a Commercial Consolidator before it has been authorised?
Many will not. Some because they do not think consolidation is right for their scheme, some will want the authorisation regime in place first and others simply will not want to be the guinea pig.
However, some trustees may be able to do so because a Commercial Consolidator clearly offers their members a much better chance of having their benefits paid in full. Ultimately, clearance from TPR will provide some comfort but in order to get there, trustees will need (amongst other things):
- An understanding of the processes and the Commercial Consolidator involved;
- Plenty of advice (including on their fiduciary duties, covenant and funding); and
- A splash of bravery!