Written by Will Watling on Monday 28 January 2019
Today I jump in my car switch on my SatNav and GPS guides me to where ever I want to be on the planet to within a few feet – wonderful tech! Go back prior to 1973 and most of us were still planning routes on Ordnance Survey maps and A-Z guides. Those of us that sailed also had to rely on sextants, wonderful precision instruments that date back to John Bird in 1759. However, both options seem a bit of a luxury compared to navigating the uncharted waters of the new breed of DB consolidation! Only recently has the DWP announced that a new regime will be set up to regulate the intrepid explorers journeying to these new lands.
DB Consolidation and the rise of a new breed of de-risking options for schemes is a topic I find fascinating. Occasionally, a truly innovative idea in the minds of entrepreneurs crystallises and becomes a real offering delivering benefits to a wide range of the public. I’d put P2P platforms in the same category of ‘disruptors’, in their case, challengers to the traditional banks using tech to forge a new path. So, I started watching with interest as the likes of The Pension Superfund and Clara-Pensions got up and running. Would they get off the ground and get the necessary approvals and clearances to start to accept their first schemes? Would others throw their hat in the ring? If so, who? How would TPT, Citrus and Deloitte’s Master Plan and KPMG’s Enplan, arguably the established options today, respond? Where would the new Hedgehog find its niche?
So, to help understand these questions and more, I offered to help organise and put together a ‘DB Consolidators Panel’ at the November The-Pension-Net-Work meeting. I’m glad to say that it was well supported not only by four of the consolidators, who were represented by their execs, but was also a sell-out for the The-Pension-Net-Work. In addition, many execs from the de-risking community attended, outsourced administrators, the Bulk Purchase Annuity providers and Employee Benefit Consultants! My thanks go to Duncan Buchanan (Hogan Lovells) who did a great job as chair, Emma Watkins (Scottish Widows) who challenged and critiqued each of the consolidators’ presentations with her dual BPA provider and trustee hats on, Luke Webster CEO from The Pensions Superfund, Adam Saron CEO of Clara-Pensions, Adrian Cooper Head of Direct Distribution from TPT and Christina Bowyer from Pinsent Mason, representing Hedgehog.
Each of the four speakers gave a short presentation of their proposition and were then asked some challenging questions or points of clarification by Emma. The delegates then had 40 minutes or so for discussion and debate with the speakers. As there was so much interest, we could easily have carried on for some time. What became clear was that the propositions fall into two main camps.
Clara-Pensions and The Pension Superfund both aim to sever the relationship and ongoing responsibilities with the scheme corporate sponsor and inject capital in differing ways in order to help the schemes they take on realise members benefits. You could say this is a kind of ‘regulatory arbitrage’ as the present funding requirements for a trust-based scheme under TPR are significantly different to those of an insurer for buy-outs under PRA. TPT and Hedgehog, on the other hand, don’t sever the scheme’s corporate sponsor’s responsibilities for ongoing funding but instead ‘consolidate’ just about everything else in order to streamline administration and hence deliver cost savings through economies of scale and access to single point services. I understand Citrus, MasterPlan and Enplan to be similar.
On the face of it, I can see both types of proposition would appeal to different types of schemes and there’ll be a place for both as the market develops. In order to dig a bit deeper, Altus conducted a survey to input into a forthcoming infographic. ‘Risk premium’ was identified as the top factor holding back the de-risking market, so not surprisingly, both types of consolidator appear appealing. However, the survey highlighted that most respondents felt that only some schemes will consider consolidation regardless of who the consolidator is. Secondly, those schemes considering consolidation will only consider one of the strategies. The sticking point here appears to be that whilst it seems financially attractive to corporate sponsors, many won’t be prepared to sever their responsibilities and pass that on to a new and unproven entity. I expect schemes whose corporate sponsor is still very much in the UK’s public eye would be highly cautious of brand reputation, should things not turn out as planned.
What the survey also revealed was the potential importance of ‘big-name’ brands entering the market. That raises an interesting point and I wonder how many of the large BPA providers today are perhaps watching with interest to see how the market develops and may then enter either through a launch or acquisition strategy.
However the market unfolds, I think the ship has well and truly sailed. Navigating the route will definitely be challenging. There’ll be rough seas ahead, a few sand banks to avoid getting marooned on and hopefully not too many distracting sirens!
I wish all those who set sail all the very best and will continue to watch with interest