As trustees and employers think about the future of their DB schemes, the range of ‘end-game’ options available to them is increasing. Consolidators, also known as ‘Superfunds’ are a new choice. ClaraPensions is one of those new consolidators, bringing schemes together and providing fully funded covenants. While consolidation is possible today, there has been much interest in the future regulatory regime for these pension schemes.
The Need for Consolidation
We believe there is clear need for consolidation. This is evident from the schemes that are showing an interest in consolidation. Their trustees and employers are looking to give their members the best chance of receiving their promised benefits in full. They are not able to afford buy-out but have a clear desire to put their pension schemes in a more secure position.
Consolidation models offer the opportunity of achieving an endgame with greater security. The consolidator takes responsibility for members from the existing scheme, replacing the traditional employer covenant with a fully-funded capital buffer. There are different models of consolidation; either the consolidator ‘running-off’ the liabilities of the scheme, or a ‘bridge-to-buyout’ model where the consolidator will pass the schemes to an insurer over time. A run-off consolidator will look to ensure it holds sufficient funds in its buffer with part of the buffer being released as profits when funding hits trigger levels. Alternatively, consolidators like Clara have a buyout destination, which means that the buffer can be structured so that neither capital nor a return on capital is released until member benefits have been fully secured. This approach means the interests of members and capital are aligned in seeking the most efficient bridge to buyout.
Broadly, we have seen three drivers for schemes considering consolidation. The first, and most notable, are trustees who are concerned that the weakness of the current employer covenant poses too high a risk to members.
These trustees recognise that a consolidator’s permanent and funded capital can provide a more secure covenant for members. The second driver is corporate activity and restructuring where the trustees and employer have a one-off opportunity to put pension scheme members in a better position. Defined Benefit (DB) pensions are a valuable benefit for members that should be protected, but they are an undoubted barrier to investment in UK employers. The third driver is the employers themselves, who want to invest in their businesses but recognise the need to first fulfil their pension obligations.
While the buy-in and buy-out market continues to show welcome growth, only around 2% of total outstanding member liabilities are being secured with insurers each year. A proportion currently falls to the safety net of the Pension Protection Fund (PPF). Remaining schemes continue to be reliant on their sponsor. The Pension and Lifetime Savings Association (PLSA) DB Task Force estimated that large numbers of members with the weakest sponsors faced only a 50:50 chance of receiving their promised pensions.
Given the scale of UK pension liabilities, more than one safe solution is needed.
The Right Regulatory Regime
Not only is consolidation needed, it is possible today under current pensions law.
Clara and other consolidators are preparing transactions. It can be safely delivered under the existing regime with close oversight from the Pensions Regulator. We are engaging closely with the Regulator and the Pension Protection Fund. They have provided both robust and helpful challenge as consolidation has developed. We are currently working intensely to satisfy the Regulator’s pre-authorisation approval requirements; quite rightly we’d expect to receive this approval before announcing our forthcoming first transactions.
While consolidation is both needed and achievable now, we’ve always supported the development of a bespoke authorisation regime – we’d like to see specific provisions include in any future pension legislation. Some have argued for a regime much stronger than that applied to other pension schemes. We think that to become a viable solution for members it is necessary for the consolidation regime to strike a balance between member security, the cost to employers and returns to the providers of capital. If the bar is set too high, consolidation will not be a viable option for trustees and employers. This will mean real loss for real members.
The Industry Perspective
We’ve been struck by the interest in consolidation from across the pensions industry. There is widespread recognition that consolidation is good policy and is needed today.
PMI’s own analysis in April showed that 67% of those surveyed thought DB consolidation a good idea. PLSA’s most recent survey from October showed 89% of pension professionals surveyed would consider consolidation as the appropriate endgame for single employer DB schemes.
Consolidation is rightly generating a wider debate across the industry about the different models available, the right approach for trustees and employers in choosing a consolidator, and how the benefits of merging administration, investment and other services are best achieved.
The PMI and PMI members have been playing an active part in this debate, helping shape consolidation so it can work for members, employers and new providers.
We’re playing our role in those debates too. Clara has a growing team and access to the experience of both our independent trustees and nonexecutive directors. Subject to approval from the Pensions Regulator, I’m hopeful that we’ll soon see consolidation making pensions safer.
Chief Executive – Clara-Pensions