Defined Benefit  

DB consolidators eye £20bn deals this year

DB consolidators eye £20bn deals this year

The two defined benefit consolidators currently in the market have a joint pipeline of deals worth £20bn, according to research from Hymans Robertson.

In its 20-page long report DB Consolidation: One year on, the consultancy reported both The Pension Superfund and Clara Pensions have seen a sharp rise in market interest since they launched in 2018.

According to figures provided by the consolidators to Hymans Robertson, Clara Pensions is expecting transactions worth about £5bn, while The Pension Superfund is anticipating deals worth almost £15bn.

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DB consolidation has been on the government's agenda, with the department for Work and Pensions publishing a consultation paper in December, which closed in February.

The consultation followed a DB white paper published in March 2018, in which the government revealed plans to promote consolidation in the DB pension market, in which two thirds of the 5,600 schemes have funding shortfalls.

The Pension Superfund was created in March but has already seen a reshuffle of its leadership team after CEO Alan Rubenstein, and one of its main investors, Warburg Pincus, announced their departure

In the meantime the consolidator has reached an agreement on its first transaction.

Clara Pensions – which will focus solely on fully-funded schemes and target smaller pension funds – received funding in December and is in discussions with dozens of pension funds on future deals.

According to Alistair Russell-Smith, partner and head of corporate DB consulting at Hymans Robertson, in just one year there has been a flurry of regulatory and market activity in this area, with momentum continuing to build.

He said: "Despite many forms of consolidation having existed for decades, the industry-wide drive to lower costs, reduce risks and improve member security has triggered a greater awareness and demand amongst trustees and sponsors for the potential benefits consolidation can achieve."

The consultancy firm’s report stated that consolidators "provide an opportunity for the next wave of schemes to become fully funded on a low risk basis, improving member security and reducing the risk on the Pension Protection Fund".

The number of schemes in this position is significant, Hymans Robertson added.

The firm stated that 9 per cent of the FTSE 350 have schemes insufficiently well-funded for a buy-out by an insurer within the next five years, but they could transfer to a commercial consolidator with less than one month’s earnings.

In an insurance buy-out, an insurance policy is issued to each pension scheme member individually, which enables the pension scheme to wind up.

Mr Russell-Smith said: "Not only should trustees and sponsors understand and consider the merits of these newer commercial consolidation vehicles as end game solutions, they should also assess the wider consolidation spectrum which can help them get to the end game more efficiently by reducing costs or simplifying governance. 

"When viewed through this wide lens, consolidation can include a range of measures like moving into a DB master trust, using an investment platform or appointing a sole professional trustee.