DB consolidation: Weighing up the options
A panel of experts have shared their views on how DB schemes can make good consolidation decisions. Kim Kaveh reports from the PLSA’s annual conference .
Fundamentally, moving a defined benefit (DB) scheme to a commercial consolidator is a very important decision for a group of trustees.
Consolidation can indeed help schemes to reduce costs per member, improve governance, and lead to more effective investment strategies through economies of scale. But it is necessary to recognise there is an array of options which should be considered; the answer for each scheme depends on its own objectives, goals, and circumstances.
Speaking at the Pensions and Lifetime Savings Association's annual conference on 17 October, a panel of experts spoke about the various issues associated with making consolidation decisions, and how they can be overcome.
‘Strength and resilience'
Squire Patton Boggs partner Wendy Hunter said: "Consolidation is about strength, resilience, and success in meeting objectives. So that doesn't really just say ‘superfunds'; it's a much broader idea.
"It's about delivering the benefits that are due when they're due, and probably as cheaply as you can. It's also about efficiencies, economies of scale, greater opportunities, and more choice for members."
So-called ‘superfunds' have been a hot topic since the government's 2018 DB white paper, and a subsequent consultation paper which highlighted the idea of commercial consolidators.
Since then two vehicles of this kind have emerged - The Pension Superfund and Clara - but they are yet to conclude a first deal while they voluntarily await regulatory approval. The Pensions Regulator is waiting for the government to set out rules on a wider authorisation, supervision, and solvency framework.
However, Hunter explained that there is a "huge range of things schemes can do to achieve efficiency and to deliver more solid outcomes without going all the way across to removing the benefits and liabilities from a scheme".
These include: investment platforms; mergers and simplification; moving to a DB master trust; and insurance buyouts.
Hunter said: "We're living in a world now where there are more members who are aware of the value of their pension scheme and the needs for security.
"So these are all things which trustees and employers have to navigate when looking at what might be the right approach for their scheme."
Options overwhelming
It is also important to note that making the decisions could be quite overwhelming, given the vast amount of options available to DB schemes.
2020 Trustees managing director Naomi L'Estrange reiterated this sentiment, adding: "I think most trustees are of the view that ‘the more options we can have to secure our members benefits, the better', but of course it is important that option is right for the scheme.
"For schemes that are already actively thinking about whether consolidators are for them, those options are even more overwhelming - the more you add, the more difficult it becomes, and balancing the different options is extremely difficult."
It is also important to note that there is no one-size-fits-all approach.
Hunter explained: "Some will go to commercial consolidators and some will follow the smaller steps. It is important that schemes focus on what they are trying to achieve, be clear how they're going to do it, and what the benefits are of the approach that they are taking."
She also noted that it is important that schemes plan ahead and give themselves time, think about it very carefully, and identify the gaps in order to figure out how to mitigate them.
Regulatory framework
Perhaps it is best to wait for the regulatory framework for superfunds to come through before making a final decision.
L'Estrange said: "I think the confirmation on the final details around the superfunds is clearly going to be crucial and the economics around security will determine whether these are a runner in the first place, that are realistic for schemes to look at.
"Equally, the security that's going to be available to our members is going to be the most important question for us. How are we measuring the comparative governance of our sponsor versus the consolidator?
"It's going to be really tricky, and lots of people say it's going to be a very brave trustee who takes that decision. Clearly that's true but equally, schemes are going to need some very, very good advice."
Indeed, earlier this month Clara told PP that scheme advisers have reported that many schemes actively thinking about consolidation are waiting in the wings for the superfunds to prove themselves before engaging.
It was hoped that in this month's Queen's Speech, a regulatory framework would appear. Nonetheless, pensions and financial inclusion minister Guy Opperman has suggested until a consultation response is published - which is expected by the end of the year - this should not be expected.
The response is pending as the government considers an authorisation, supervision and solvency regime.
In the session, Department for Work and Pensions DB consolidation lead Des Healy noted that the government supports all forms of consolidation, adding that it does not want to see superfunds "folding over".
He said: "The risk appetite on failure is very low. All of this impacts the price and capital that superfunds have to hold. But we also need to make them profitable and get the extra capital coming in from investors who are going to back superfunds going forward."
Healy continued: "We need to find a sweet spot for an area we think we can manage these three areas safely."
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