Over a third of pension scheme trustees believe consolidating defined benefit (DB) pensions into a pension ‘super fund’ would appeal to corporate sponsors, but only a quarter would feel comfortable judging whether such a move would make sense, according to Willis Towers Watson.
This kind of DB consolidation would allow employers to remove pension liabilities from their balance sheets without having to secure all benefits with an insurer.
However, in a survey of 93 UK pension scheme trustees, Willis observed considerable apprehension, with only 43% of respondents saying they believed that transferring liabilities to consolidation vehicles would significantly improve the efficiency of DB pensions in the UK.
Gareth Strange, Senior Director at Willis Towers Watson, said: “Many trustees are expecting to be asked by their scheme sponsor to sign-off on moving the scheme into a consolidation vehicle, but our research shows that very few would feel comfortable weighing the potential benefits and disadvantages at this stage. It’s a difficult decision that trustees aren’t used to making.”
In return for giving up future recourse to the sponsor, trustees can typically expect members’ benefits to be backed by a higher initial funding level and by capital put up by investors in the consolidator, although this capital would be less than insurance companies hold to support annuities.
Strange continued: “The sweet spot for these consolidators is likely to be schemes that are already reasonably well-funded and where the employer could inject some extra cash quickly, but in order for trustees to sign off on it, they would have to be confident that the consolidator’s long-term viability is stronger than that of their own scheme sponsor. This could result in quite limited take up for ‘Super Fund’ consolidation vehicles.
“This might be a good option for trustees who are concerned over their scheme’s long-term covenant. There will certainly be some schemes that fall into this bracket, but it’s unlikely to be the option that most pension scheme trustees decide upon, particularly when many of the efficiency and cost saving benefits could be achieved through asset pooling and consolidation of advisors, which doesn’t remove the Trustee or the Scheme Sponsor.”
The UK Government has said that it will consult on a regulatory regime for consolidation vehicles this year, but most trustees can expect other forms of consolidation, which do not involve separating schemes from sponsoring employers, to become significant trends over the next five years.
Willis also observed that 73% of trustees expect more outsourcing of functions like administration and secretarial support in future, while 54% anticipate increased delegation of investment decisions to a fiduciary manager.
“From the employer perspective, some will think they can run the scheme off themselves more cheaply, whereas others may not want the reputational risk of washing their hands of the pension scheme without making benefits fully secure,” said Strange. “That leaves consolidators targeting a very small part of the market.”
