Schemes must consider full range of 'spaghetti junction' consolidation options

Pension schemes and sponsors should ensure they are prepared to consider the full "spaghetti junction" of consolidation options, with innovative solutions emerging for smaller and medium-sized schemes, according to Mercer.

Speaking to Pensions Age, Mercer partner and head of risk transfer, Andrew Ward, explained that many may have equated defined benefit consolidation with pension superfunds, noting that recent guidance gateway guidance would help give a clearer path for these options.

“However, in practice, the spectrum of consolidation is much wider and there is now a kind of spaghetti junction of options out there,” he clarified.

Ward highlighted three cornerstones that can help trustees drive the right outcomes, stressing the importance of stakeholder engagement and having a dynamic solution, adding that scheme positions can develop, as seen in recent market volatility.

He also emphasised that trustees and sponsors must receive curated expertise from advisers who are able to “look through the weeds” and gauge the relevant options that fit with the specific scheme objectives.

Echoing this, Mercer UK head of bulk pensions insurance, David Ellis, stated that there is a “ever growing range of choice”, agreeing however, that a scattergun approach does not work.

He added: “No one client is the same, everyone is unique, these are pension plans so it’s the members that really count, but also the trustees and the employer, so it’s very important to look through corporate structures and see the lives behind – the People First approach."

Adding to this, Ward clarified that whilst it’s not in anyone’s interest for consultants to provide a “flavour of the week”, there is a place for innovation.

He explained: “Individual clients have very distinct objectives and as long as you bring the right expertise, the right options and engage in the right way, then many of them will be open to new solutions.

“They will be rightly cautious, as is appropriate for trustees and sponsors, but they will be keen to explore whether these new ideas can give better outcomes to their members and other stakeholders."

Mercer partner, Suthan Rajagopalan, also noted that whilst there is a risk that there’s too much choice, there is “always need for innovation”.

Indeed, Rajagopalan stressed that this innovation can also in turn help support smaller schemes, noting that once new solutions are evolved with larger schemes, they can be provided as almost an ‘off the shelf’ solution for smaller schemes.

He stated: “I think there’s been a recognition, certainly within Mercer, that we need to make some of these innovations accessible to smaller schemes and give them a fit for purpose solution.

“So maybe it’s not got all the bells and whistles, we streamline it and we give them certainty in terms of much more clarity on what it does and doesn’t do and what it costs.”

Adding to this, he also highlighted that there are elements of de-risking that schemes can do along the way to a bulk annuity, such as inflation or longevity hedging, emphasising that these are still transferable to an insurer.

He stated: “Now for years, insurers have been accepting inflation and interest rate swaps , there’s been eight longevity swaps now transferred to bulk annuities providers.

“A longevity swap isn’t suitable for every scheme, if you’re very close to being able to afford a bulk annuity, you should just crack on and do it. If you’re more than a few years away, it can be a sensible stepping stone.”

Meanwhile, Ellis emphasised that despite market challenges amid the pandemic, there has still be strong activity and volumes of transactions, particularly for smaller schemes.

He continued: “I think it will be the busiest year for small and mid-sized schemes, in terms of volumes done there. I think it is the year where a number of firsts have happened, and consolidation as a topic has really got a foot in.

“I think it’s also been a year where there’s been some really attractive pricing and locked in really quickly – there’s very good evidence that whatever the challenges, on the whole things are working very well if you’re prepared.”

Ellis emphasised that preparation and ongoing engagement with the market could also allow schemes to take advantage of market and pricing variabilities.

He explained: “A large part of what we do is transactions, it’s a negotiated deal. And there are lots of influences on the outcome of that deal, it’s not just, for example, actuarial science as to what we think the price will finally be."

Ellis stated that many people may be unduly guided by the desktop estimates included in their triennial valuations, noting that the true outcome is probably a lot more uncertain than that single point estimate.

He added: "There’s probably a lot of movement and play in that, and that then plays into market conditions and credit spreads in particular.

“Once people realise that there’s flexibility and that they need to be there in the market to do that, at the right time.

"You can’t just take a scheme that obviously isn’t ready to transact to market, that doesn’t work, but once you understand there’s variability in that you can turn it to your advantage."

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