“We are optimistic about the future for consolidation. But looking historically, there are two reasons why we haven’t seen more consolidation in the DB market to date: one is awareness and the other is appetite.
“Levels of awareness, which have been low and are a barrier, is starting to change, helped by the DWP white paper and subsequent consultation, the CMA review and this inquiry. Consolidation has risen up the agenda.
“A lack of appetite is due to the degree of financial challenge schemes put on the sponsoring employer of a scheme. As a result sponsors are unwilling to take steps to reduce the amount of control they have over the scheme. Consolidation vehicles historically have had less bespoke structures, so the benefits of scale have come with less control. Most sponsors have taken the decision that they are not willing to give up control for lower costs.”
Commenting on the future for consolidation, he added: “There are consolidation options on the horizon, within the current legislative regime, that will change this dynamic. The time does feel ripe. More energy is being put into finding solutions to consolidate assets and liabilities that either offer more than just cost savings, or offer those savings without relinquishing control. Consolidation will gain much more momentum over the coming five years than we have seen over the past ten.”
Explaining where superfund or commercial consolidation vehicles could have a role to play, he added: “We need to remember that insurance is the gold standard for DB scheme members. It’s through insurance that members have the highest level of security.
There is a top layer of schemes that are in the strongest position, their members have the highest levels of security, and they should be in a strong position to consolidate through buyout and secure benefits in the next 10 to 20 years.
“It’s the next layer of schemes underneath where superfund structures provide a helpful solution, improving the security of members’ benefits. The reason sponsors will be attracted is they no longer need control if someone else is taking responsibility for the liabilities. The benefits for members are improved security as they sponsors are motivated to pay in a final cheque to get relieved of liabilities, and investors putting in capital. This means on day one we see more money coming into the system improving security of benefits for members. There are economies from scale through consolidation but these benefits are second order.
“But there is a layer of schemes underneath those in a strong position. These are so poorly funded and their sponsors are sufficiently weak that there’s just not enough money to secure these benefits with a high chance with anyone. If there’s one thing missing from White Paper it’s a stimulus to have a grown-up conversation around what we do to support these schemes. There are material risks and this risk is to millions of members.”
Cautioning against waiting three years for a new legislation to support consolidation, he added: “We should not move so carefully with SuperFunds that we don’t do anything at all for 3 years. The Pensions Regulator should look to the experience of the FCA’s Regulatory Sandbox. TPR should look to emulate this approach, and start looking at which structures offer the best security to members and learn in a safe environment.”
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