Pension trustees' awareness of DB commercial consolidators rising

Defined benefit (DB) pension trustees' awareness of the two main commercial consolidators, The Pension Superfund (TPS) and Clara-Pensions, has “rocketed” over the past 12 months, according to Hymans Robertson.

In a recent survey, the firm found that 8 per cent of DB trustees had never heard of TPS, compared to 35 per cent of those surveyed last year.

Awareness of Clara-Pensions had also increased, with 17 per cent saying they had never heard of the consolidation vehicle compared to 60 per cent last year.

In June 2020, The Pensions Regulator (TPR) launched an interim regulatory framework for DB pension commercial consolidators.

According to Hymans Robertson, the increased awareness is starting to influence DB schemes’ long-term objectives.

In the schemes that had reviewed their ultimate goal in the past 12 months, 33 per cent of trustees said that ‘determining whether or not they might benefit from commercial consolidation’ was their main driver for doing so.

Commenting on the findings, Hymans Robertson head of corporate DB, Alistair Russell-Smith, said: “Clearly awareness is growing in the industry about the commercial consolidators and it is interesting to see that they are beginning to influence long-term objectives for DB schemes.

“One of the outcomes of the Covid-19 crisis is that it has highlighted the frailty of some sponsor covenants. Even when schemes are fully funded on technical provisions and not receiving deficit contributions from the sponsor, they remain exposed to the sponsor covenant.

“This is because corporate insolvency triggers scheme wind-up and a haircut to members’ benefits, unless the scheme is fully funded on an insurance buyout basis. The scheme is therefore in a race to reach buy-out funding before the sponsor defaults.”

Russell-Smith warned that, as the new DB funding regime is expected to require schemes to be fully funded on a low dependency basis in 15-20 years, schemes may only reach a “more prudent” buyout funding position in 20 years or more.

“The risk of employer default before reaching full buyout funding is very real – there’s already a 1-in-4 chance of sub-investment grade sponsor failure by 2040; and the solvency stresses and economic uncertainty through COVID-19 is only re-affirming the risk,” he added.

“Commercial consolidators, such as TPS and Clara-Pensions, provide an ‘insolvency remote’ solution because employer default no longer triggers a scheme wind-up once the scheme is in a consolidator.

“In cases where employer default is a realistic possibility on the journey to buyout, moving to a commercial consolidator starts to look a sensible way to protect against a hair-cut to members’ benefits on an employer default.”

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