Consolidation of defined benefit pension schemes
01 Feb 2019
Commenting on the Government’s consultation into the consolidation of DB pension schemes, Alistair Russell-Smith, Head of Corporate DB, says:
“In responding to the DWP’s consultation we have reiterated our support for the development of commercial consolidators. We believe that they will lead to better outcomes for many DB members than they are 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, then this will lead to better funded schemes, a vast improvement in member security, and far lower risk to the PPF. 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 already. It must be recognised, however, that for schemes with a strong probability of achieving buy-out in the short term, consolidation would not be right. These schemes should instead be aiming for the higher protection of member security offered by insurers.
“Where consolidators will provide opportunity will be 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 could be significant as we estimate that 9% of the FTSE350 could currently transfer to a consolidator with less than 1 month’s earnings. Getting the clean break in exchange for the cash injection gives a real incentive to employers to agree to do this.
“We do not think that consolidators should be forced to have a common Long Term Objective or to all aim for insurance buy-out themselves. Allowing flexibility here will drive innovation and ultimately ensure a competitive marketplace with a range of solutions for different scheme circumstances.
“It is worth noting that consolidators don’t fix the problem for schemes where the employer simply can’t afford to fund the deficit. So, 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.
“The evolution and accreditation of DB Master Trust is also a noteworthy development. These provide a vehicle for poorly funded schemes with weak sponsors to significantly reduce running costs and access efficient investment strategies. This should improve the schemes’ ability to bridge the deficit over time, and they could potentially become sufficiently well-funded to go into a commercial consolidator or the insurance regime.”