28 February 2020
Is Clara Pensions going to be the first to do a deal or will the Pension SuperFund transact first? Who is going to be the most successful in the long-term? Will we see some new entrants to the market this year, once deals start happening?
We don’t have answers to these questions yet but I think that now is the time for companies and trustees to consider consolidators as another tool in their armoury - whether for transferring their scheme liabilities or just setting a long-term funding target to satisfy the Pensions Regulator.
The Pension Schemes Bill was published by the Government in early January, but it contained nothing to provide legislation for the DB Consolidator regime.
Despite this disappointment, we must remember that legislation is already in place allowing such transactions to take place. The two consolidators actively marketing themselves (Clara Pensions and the Pensions SuperFund) continue to engage with many pension schemes and are looking to write their first transactions. They can seek Pensions Regulator approval through an interim process, whilst waiting for more legislation, but it is unclear how long this will take.
Meanwhile we continue to see welcome innovation in the pensions market, with ever increasing potential solutions to help trustees and sponsors achieve their role of ensuring members’ benefits are provided for. It promises to be another exciting year ahead in the pensions world.
Start at the beginning: What is a consolidator?
A consolidator is a defined benefit scheme into which pension scheme liabilities can be transferred, typically mirroring the benefits from the original pension scheme. The scheme’s sponsor covenant is replaced by capital, provided by investors. To transact, a cash injection from the sponsor is likely to be needed, but at a significantly lower cost than buy-out.
Consolidators operate in the UK pensions regime, not insurance, and so are not subject to the strict Solvency II requirements applied to insurers. Therefore, they do not need to hold the same level of capital, have more investment freedom and benefit from not being subject to the costs associated with complying with Solvency II. However, this also means the DB consolidators are not subject to the same regulatory oversight as insurers and so offer a lower level of member protection.
Consolidators aim to make savings through economies of scale (reduced costs, improved investment efficiency and improved governance and risk management). Not all of the funding upside is taken by the financial backers of both the Clara Pensions and the Pension SuperFund (PSF) and the models work in different ways – the PSF sharing any outperformance by improving benefits, and Clara Pensions through moving to an insurance company buy-out sooner.
What should companies and trustees do now?
As mentioned above, Clara and PSF have several transactions currently in the pipeline and I expect that come the end of 2020, there will be many more transactions in the pipeline, as the first deals complete and companies and trustees get more comfortable with this new solution. Companies and trustees should investigate the options now, so that they don’t miss out on the attractive pricing that will provide for their member’s pension benefits and relieve them of their duties.