The Pensions Regulator has approved the first defined benefit (DB) consolidator (or “superfund”), a new type of consolidated vehicle which has been designed to take DB pension funds off employers’ hands and pool them in order to manage them more efficiently, both in the name of profit and for the benefit of members. This development has been years in the making due to concerns around the erosion of protection for members. Indeed, the Prudential Regulation Authority has said that they should only be used as a “bridge” whereby the scheme is run by a consolidator until they can be passed on to an insurance company for buyout.
The Department for Work and Pensions (DWP) has suggested that well-regulated consolidators could provide an effective way for some defined benefit schemes to manage their liabilities, and improve the likelihood of benefits being paid in full. Indeed, commentators believe that the consolidator will become a strong option for schemes with struggling sponsors as an alternative avenue to a buyout from the Pension Protection Fund (PPF). The PPF is a valued safety net for DB schemes. However, there are often haircuts applied to individual member benefits when a scheme enters the PPF which could be avoided under the consolidator model. It has been noted that, in this case, schemes should still go through a PPF assessment prior to any consolidator transition. Additionally, for schemes looking to wind up that are unlikely to reach buyout funding levels in the near future, the consolidator could offer a solution for both members and employers.
The Pensions Regulator has published interim guidance on consolidators, setting out a framework for the first consolidators to be approved. However, there are considerable uncertainties which remain from a regulatory perspective. Most significantly, there are a number of technical differences between the proposals published separately by the DWP and the Pensions Regulator’s guidance. It is also unclear whether or not occupational pension-style rules for financial sustainability will apply to consolidators, or whether an insurance-style approach obliging the fund to meet a required level of solvency will be taken.
Whilst the impact on members’ protections is still to be revealed as more consolidators are approved, it is clear these vehicles will hold an interesting role in the future of DB pension schemes, opening up a new avenue for struggling schemes. The regulatory future is unclear, but these funds have the potential to increase the chances of member benefits being paid in full whilst offering the employer the opportunity to settle their pension bills.