Industry believes DB consolidation could improve member outcomes

Some industry members insisted that member outcomes could improve if defined benefit pension consolidation becomes commonplace in their responses to the government’s consultation.

The majority of respondents also said that they believed the introduction of DB consolidation would improve member security.

Hymans Robertson head of corporate DB, Alistair Russell-Smith explained: “We believe that they [DB consolidators] will lead to better outcomes for many DB members than they are likely to achieve in the current environment.

“If they can be the trigger that persuades corporates to pay a significant cash injection into their DB scheme in return for a clean break, then this will lead to better funded schemes, a vast improvement in member security, and far lower risk to the Pension Protection Fund (PPF).”

The Pensions and Lifetime Savings Association (PLSA) head of DB, Joe Dabrowski agreed: “These proposals provide a real opportunity to provide better outcomes for savers and to get more funding into schemes with weaker employers more quickly.

“Superfunds can provide schemes with a distinct new option, that addresses the binary nature of the current system, and keeps greater levels of member security out of the reach of very many schemes.”

However, most respondents agreed that strong governance and regulations were needed to ensure that DB consolidation could be a success.

In its response, the Society of Pension Professionals stated: “A consolidation of risk into a small number of providers could ultimately lead to superfunds that are of national economic importance and therefore ‘too big to fail’.

“The effect of this on future policy development and the PPF needs to be fully understood. With appropriate governance and regulation (including appropriate funding standards), we think this risk could be mitigated to an acceptable level.”

Herbert Smith Freehills pensions partner, Rachel Pinto, explained that she believed The Pensions Regulator (TPR) should take a central role: "If the government supports the development of the market for DB consolidation it is essential that TPR is given sufficient powers and resource to supervise superfunds effectively.

“Without additional powers to oversee both the operation of the superfund and the management of the buffer fund, members' benefits risk not being adequately safeguarded."

Industry members also highlighted the importance of flexibility to promote competition, with Russell-Smith adding: “We do not think that consolidators should be forced to have a common long term objective or to all aim for insurance buy-out themselves.

“Allowing flexibility here will drive innovation and ultimately ensure a competitive marketplace with a range of solutions for different scheme circumstances.”

However, Herbert Smith Freehills questioned whether the proposed regulatory gateway will be workable, with Pinto concluding: "It is unclear how the gateway will operate in practice.

"How likely does a buyout need to be? What if a sponsor is willing to fund consolidation but is not willing to fund a buy out? And what if a scheme may be able to afford to buy out the benefits of pensioner members but not deferred? These are issues that the DWP and the regulator will have to address."

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