Could commercial consolidation be right for your scheme?
01 Mar 2019
The Department for Work and Pensions (DWP) recently consulted on a suitable framework for the consolidation of DB pensions schemes, emphasising the continued momentum around this.
Here we summarise our response to the consultation, taking a look at when, and when not, commercial consolidators could benefit schemes and their members.
When should commercial consolidation be considered
New commercial consolidators like Clara-Pensions and The Pension SuperFund could lead to better outcomes for many DB members than they’re likely to achieve in the current environment. If they can be the trigger that persuades corporates to pay a significant cash injection into their DB scheme in return for a clean break, this will lead to better funded schemes, a vast improvement in member security, and far lower risk to the Pension Protection Fund (PPF).
Consolidators will provide opportunity for the next wave of schemes to become fully funded on a low risk basis. This will be where the employer can afford the cash injection. The number of schemes in this position is significant - 9% of the FTSE350 could currently transfer to a consolidator with less than 1 month’s earnings1. Getting the clean break in exchange for the cash injection gives a real incentive to employers to agree to do this.
When it’s not right to consider
There are a cohort of schemes that are already close to buy-out and our estimates show that 12% of the FTSE350 are in a position to buy-out already1. Commercial consolidation would not be right for these schemes. They should instead be aiming for the higher protection of member security offered by insurers.
It is worth noting that consolidators also don’t fix the problem for schemes where the employer simply can’t afford to fund the deficit. Thus, we could be left with a cohort of poorly funded schemes with weak employer covenants for which the PPF may be the inevitable outcome. As commercial consolidators take off, however, they will reduce the risk to the PPF overall and improve its ability to absorb these remaining schemes with the real affordability constraints.
What about DB Master Trusts?
It’s not all about commercial consolidation. The evolution and accreditation of DB Master Trusts is also a noteworthy development. Master Trusts like Citrus Pensions provide a vehicle for poorly funded schemes with weak sponsors to significantly reduce running costs and access more efficient investment strategies. This should improve schemes’ abilities to bridge the deficit over time, and potentially become sufficiently well-funded to go into a commercial consolidator or the insurance regime longer term.
In responding to this consultation, we reiterated our support for the development of commercial consolidators. We believe this new development will provide better outcomes for many schemes and their members. And allowing consolidators to have flexibility in setting their long term objective will drive innovation and ultimately ensure a competitive marketplace with a range of solutions for different scheme circumstances.
To read our full response to DWP’s consultation, please click here.
A closer look at DB scheme consolidation
In our ‘closer look’ consolidation series, we’ll be taking an in-depth look at each consolidator vehicle in turn. So far, we've released more insights on Clara-Pensions and The Pension SuperFund - download your copies now!