While near half (46%) of respondents recognise consolidation as a potential endgame that they might consider in the future, just 11% of respondents are currently considering this option.
With Superfunds still in a developmental phase, insurance ‘buy-out’ remains the most popular scheme end-game / long-term funding objective for two fifths (40%) of respondents, while a similar number (39%) are targeting a ‘low-risk’ basis (sometimes referred to as ‘self-sufficiency’).
When asked about the most important benefits of consolidation, almost three quarters (71%) recognised ‘increased security’ as being ‘very important’, while 42% saw ‘improved funding with better access to capital’ as being ‘very important’. Conversely, only 21% ranked improved governance as a top priority.
Assessing the potential disadvantages of consolidation, over three quarters (78%) saw the potential ‘failure of the chosen consolidator’ as being ‘very important’ while an ‘uncertain regulatory regime and risk of transaction being challenged in the future’ was recognised as being ‘very important’ by 49%. Less than half (44%) saw ‘severing the link with the existing / legacy employer’ as ‘very important’.
Recognising potential concerns surrounding superfunds, the Pensions Regulator is expected to introduce a strict authorisation and regulatory regime for superfunds. Against this backdrop, three fifths (60%) of those polled acknowledged that the regulatory framework should ensure the superfund covenant is stronger than the employer covenant available to the transferring pension schemes. Over a fifth (21%) stated that all superfunds should target the same minimum level of covenant strength which is defined as the capital in excess of the insurance buy-out cost. Only 14% of respondents supported a regulatory framework that is based on a given probabilistic measure of success (ie DWP’s consultation is currently considering targeting a 99% probability of meeting full benefits).
The DWP consultation proposes to subject superfund transactions to gateway conditions, including that an insurance buy-out would be unlikely to be attainable within the next five years (TPR’s guidance on consolidation sets this at three to five years). Over a fourth (27%) of respondents anticipate that their schemes will reach their end-game within 5 years, while less than one tenth (8%) anticipate reaching that target within three years.
The consultation also noted that the DWP “would expect an external covenant assessment by a regulated provider to be an essential component for the trustees when considering this complex [transaction]”. In response to this, three quarters (75%) recognised the need for covenant advice to be mandatory, with over a fifth (22%) stating that covenant advice should be prepared on a ‘comply or explain basis’.
Darren Redmayne, CEO of Lincoln Pensions, said: “Our inaugural DB consolidation survey reveals unsurprisingly that the security of members’ benefits – or covenant – is rightly at the heart of any decision to “switch covenant” [from sponsor to consolidator]. Any new regulatory regime must focus on ensuring that ‘superfund’ [or similar transactions] deliver genuine covenant improvement. Our survey highlights a concern in the pensions industry that stakeholders will place too much emphasis on probability models to answer the hugely complex question regarding whether the covenant of a consolidator is better. While such modelling will likely play a role in the “covenant test” for consolidation transactions, Lincoln Pensions’ believe it is only one element of a multi-faceted and complex assessment on whether or not to proceed with a consolidation transaction.”
Adolfo Aponte, Director at Lincoln Pensions, said: “While superfund consolidation is not going to be right for everyone, it is clear that pension professionals believe it could be right for a number of schemes, if an appropriate regulatory framework can be put in place. It is understandable that uncertainty about regulation hampers the enthusiasm to be a first mover – however, once established, superfund appetite appears to be material.”
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