What role will a public sector consolidator play in the UK market?

What an interesting time it is to be involved in the world of defined benefit (DB) pensions! Never have funding surpluses been so ripe, the insurance market so busy, and innovation so important.

I was delighted to discover how relieved members of the Debenhams Retirement Scheme were when their benefits were restored in full on transfer to Clara Pensions. But with improved funding levels has there been a change in mindset about what really matters?

I started working with DB pensions as a trainee actuary 16 years ago when trustees and employers were quite rightly concerned about deficits and protecting accrued benefits for their pension scheme members. All of us in the industry were doing a ‘good thing’, ensuring that members’ benefits would be paid in full as much as possible.

As DB schemes rapidly started to close to new members and future accrual, along with the rest of the industry I started to wonder what this meant for the future of DB schemes – and if they would be around long enough for me to make a successful career out of them.

All change

Fast forward 15 years and lots of us are still very busy working in the DB pensions space, but the discussion has changed. With an estimated £469bn or so of DB scheme surpluses available according to the Pension Protection Fund, the debate is about who all this money belongs to and who should benefit from it.

While many trustees are pleased to now be able to secure member benefits in full with an insurer, this is no longer the only draw. Employers are welcoming potential changes to the regime that will more easily enable them to get some of the money back, and the government is proposing to utilise DB assets by setting up a public sector consolidator as part of plans to drive its ‘productive finance’ agenda.

But has the focus on doing a ‘good thing’ for members been lost? Trustees’ fiduciary duties should ensure that benefit security isn’t compromised if employers take a refund of surplus, and my personal hope is that members will get a share via discretionary increases to pensions – so we may be OK when it comes to utilising surpluses.

As for the public sector consolidator, it has two key objectives: the productive finance agenda, and addressing a perceived failure in the insurance market for small schemes.

On the face of it these appear to be at odds with each other. If the government wants to maximise the amount of DB assets it could direct into productive finance then it should focus on onboarding the largest schemes that it can, but that clearly wouldn’t address the objective of helping small schemes, which arguably should be the priority if a market failure does exist and members are to be at the forefront.

The proposed design of the consolidator, as set out in the Department for Work and Pensions’ ‘Options for DB Schemes’ consultation, is of a vehicle that is available for all schemes, with government underwriting it and a lower entry price than the insurance market can offer. It also provides a route for employers to sever links with their schemes while still in deficit.

Food for thought

Industry reactions to the proposals quite rightly note the potential for significant market disruption and that such a consolidator could well be attractive to most schemes, regardless of size. It is difficult to see how the small schemes that find it harder to access the insurance market would be prioritised. This needs further thought.

Either way, such potential for improvements in benefit security may be no bad thing for many of the members who transfer to a public sector consolidator.

What about the longevity of my career? I don’t see the workload on DB schemes disappearing any time soon and there is always a new challenge around the corner. So, I think there is enough to keep me going until it’s my turn to retire (with my DC pension).

Rosie Twist is a member of the DB committee at the Society of Pension Professionals.