What is Pension Scheme Consolidation?

21 May 2019

Will consolidation be a means to an end for defined benefit pension schemes?

The UK government’s Department for Work and Pensions has stated its ambition to support and consult on another route to an end game that facilitates pension scheme consolidation. Consolidation here means more than just bundling actuarial, administration and investment or fiduciary management services as it stands today.

The potential game changer lies in the severed link between scheme and sponsor; the scheme is in effect transplanted to a new sponsor, who supports it financially going forward. Put simply, the scheme is fundamentally separated from its creator and no longer appears on its balance sheet.

The scheme is fundamentally separated from its creator and no longer appears on its balance sheet.

It is yet to be seen how this potential end game solution – with a regulation back-stop – will develop. It could be a viable solution if a pension scheme is willing to pay a premium to boost its funding level and fund a consolidator’s reserving and profit requirements. For some, improving the funding position enough to enable a buyout may be out of reach, but improving it enough to transfer it to a consolidator may be possible.

This route could well be attractive to a company that would like to permanently sever financial support to its DB pension scheme and rid itself of the associated balance sheet risk. Of course, pension scheme trustees would need to fully investigate a consolidator’s sponsor strength before switching financial support to another entity.

To reach this potential end game, an investment strategy would need customising to a target that meets the consolidator’s funding requirements over a suitable time horizon, with a suitable level of risk. We will continue to monitor this new legislative framework for authorising and regulating defined benefit ‘superfund’ consolidation schemes.

We can help you navigate the full suite of end-game solutions

Our heritage has taught us that each scheme needs to carefully consider what is important to them. Ultimately, our goal as a fiduciary manager is to help improve the funding levels of our clients in order to put end-game conversations on the table.

When end game is in view, our specialist partner transaction advisers are engaged to secure an insurance deal that is best aligned with a scheme’s needs. In this process, free from conflict, clients are reassured that the only objective in mind is securing the best benefits for pension members.

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