Breaking DB consolidator stalemate could lead to ‘explosion' of scheme strategy diversity

If the coronavirus triggers an end to the regulatory stalemate surrounding defined benefit (DB) pension consolidators, it could lead to an “explosion of diversity” for workplace pension schemes, according to former Pensions Minister, Steve Webb.

Lane Clark and Peacock (LCP) partner, Webb, said that the current crisis could act as a trigger in pushing forward DB consolidator regulation, as an increasing number of schemes have sponsoring employers that are weaker than before the pandemic.

This is likely to increase the number of cases of insolvency where funding levels are above Pension Protection Fund (PPF) qualification levels but below the amount needed to insure pensions in full, which in turn is likely to lead to a rising interest in consolidator models.

Webb predicted that the government will come under increased pressure to break the stalemate, as progress could produce better outcomes for members than “traditional routes”.

Regulatory progress has primarily been stalled by concerns from the Treasury and the Prudential Regulatory Authority (PRA) that DB consolidators could act as unfair competition for the insurance and buy-out markets.

Ending the regulatory limbo could lead to “an explosion of diversity” in potential strategies for company DB schemes.

According to Webb, these include consolidators as a route to buyout, consolidators which take over the pension scheme to run it on, and 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.

He noted that while a new act of parliament to legislate for DB consolidators is likely to be “years away”, The Pensions Regulator has indicated that it would consider an interim framework to get the market started.

“Historically, pension schemes have been heading either for a buyout or have planned to run on to meet liabilities as they fall due,” commented Webb.

"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”.

Two DB consolidators, or ‘superfunds’, have already entered the market – Clara Pensions and The Pension Superfund.

Both have transactions already in the pipeline, but they operate slightly differently.
Both transfer a scheme’s assets and liabilities to a new DB scheme backed by additional capital from external investors, with the sponsor support replaced by the covenant of the external investors.

However, Clara Pensions manages assets and liabilities as individual parts, then transfers them into the insurance market when they are sufficiently funded to move to buy-out sooner, while The Pension Superfund combines all incoming liabilities and assets and runs them off in a single trust, sharing any outperformance by improving benefits.

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