The idea of company pension schemes dealing with their liabilities through a ‘consolidator’ has been discussed within and beyond government for several years. The main stumbling block has come from the Treasury and the Prudential Regulatory Authority (PRA) who are concerned that consolidators might act as unfair competition for the insurance industry and the buy-out market. Until recently the whole concept has been in limbo as potential market players wait for government to make up its mind.
However, according to Steve Webb, the current crisis could act as a trigger to unlock the necessary legal framework. Growing numbers of schemes may have sponsoring employers who are weaker than before and in some cases may face insolvencies at a time when funding levels are above PPF levels but short of the amount needed to insure pensions in full. This is likely to trigger growing interest in consolidator models. Government is likely to come under pressure to resolve this issue, especially where options are available which could produce better outcomes for members than traditional routes.
Consolidator-type options could include:
• Consolidators as a route to buyout;
• Consolidators which take over the pension scheme to run it on;
• Other bespoke ‘innovative’ solutions involving capital providers offering to boost the funding of the scheme in return for a potential ‘upside’ return from keeping the scheme going;
Whilst a new Act of Parliament to legislate for consolidators is still likely to be years away, the Pensions Regulator has previously indicated that it would be willing to issue an ‘interim’ regulatory framework to enable the market to get started, pending a final framework from central government. Central government is now expected to devote more attention to resolve this matter in a way which would allow the market – and its many variants – to develop.
Commenting, Steve Webb, partner at LCP said: “Historically, pension schemes have been heading either for a buyout or have planned to run on to meet liabilities as they fall due. But in recent years a range of new funding models have come forward, many of which involve new ways of getting external capital involved. Until now everything has been in limbo while battle has raged in central government over whether these approaches should be allowed. But the time has now come for government to make a decision once-and-for-all. If the go ahead is given, we are likely to see an explosion in diversity of scheme strategies. Trustees will start to see a menu of options which they will want to tailor to their specific circumstances. The range of funding strategies in the DB world could look very different this time next year”.
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