The government must be “much clearer” on the outcomes it wants from commercial consolidators, in order to achieve “concrete policy proposals”, Willis Towers Watson (WTW) has suggested.

Responding to the government’s consultation on the consolidation of defined benefit pension schemes, WTW has urged the government to not over regulate consolidators, before it is properly understood what is needed.

In December, the government outlined a new legislative and regulatory regime requiring defined benefit superfunds to be authorised, supervised by The Pensions Regulator.

Despite this, WTW managing director, Mark Duke, said: “Clearly, commercial consolidators pose new regulatory challenges. But before any new layers of regulation are imposed, we need to be clear on why and how the current legal framework is deemed inadequate.

“Before agreeing to any transfer, trustees would have to be convinced that a consolidator offered a safer home for their members’ pensions and that it made sense to swap the employer covenant for a cash injection which they would not otherwise receive any time soon.”

TPR will be responsible for assessing the consolidators’ business model, its financial stability, governance and ability to pay members benefits, while employers will have to seek clearance before any proposed transfer to a superfund.

Alongside the regulatory requirements, the regulator has published guidance for employers, superfunds and trustees ahead of authorisation.

According to the consultation paper, the government may require consolidators to demonstrate at least 99 per cent probability of paying all members benefits in full, a move which Duke believes could result in “killing off commercial consolidation before it has the change to take off”.

“This is likely to involve complex modelling where model calibration could materially influence the result. Indeed, while this is not the intention, there are legitimate ways of interpreting the 99 per cent that would deliver a regime stronger than that for insurers," Duke said.

“Whatever the 99 per cent requirement ultimately means, we believe a better way to evaluate regulatory principles is to use ‘strawman’ examples, working back from the desired outcomes, rather than simply picking an arbitrary percentage.”

The consultation will close on Friday 1 February.

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