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Survey Report

Consolidation: one year on

Chapter seven of the 2020 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions

By Tom Ashworth | January 20, 2020

Tom Ashworth takes a look at some of the benefits of commercial consolidation, where it may be a viable option for a scheme, the circumstances where it may not be appropriate and the reasons why or why not.

We are now nearly 12 months on from the closure of the consultation on the framework for authorising and regulating commercial consolidators and (at the time of writing) the government has yet to settle on the regulatory regime.

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What are commercial consolidators?

  • Commercial consolidators are vehicles into which a pension scheme can transfer responsibility for paying benefits.
  • To enable this clean break, the sponsor will typically make a cash injection.
  • The commercial consolidator will also inject capital, in much the same way as insurers in a bulk annuity transaction, although to a lower level.
  • The commercial consolidator is then responsible for running and meeting the liabilities of the scheme, and a new board of trustees provided by the consolidator will be responsible for scheme governance.  A consolidator therefore replaces the unknown future value of the sponsor covenant, with a monetary amount of capital on day one.

The delayed timetable has been in part caused by the unexpected general election at the end of 2019, leading to the dissolution of parliament and uncertainty regarding the future government and pensions minister. With the dust now settled, we expect further clarity around the authorisation regime in early 2020, which could lead to an uptick in activity.

This delayed response has given market participants time to further consider commercial consolidators as a concept and the scenarios in which they may be right for their scheme. Willis Towers Watson’s recent survey showed that the industry sees consolidation playing an important future role in the pensions arena (see Figure 10).

Figure 10. How likely do you think it is that a significant number of schemes will be absorbed by commercial consolidators in the next five years?
Figure 10. How likely do you think it is that a significant number of schemes will be absorbed by commercial consolidators in the next five years?

Source: Willis Towers Watson

To date, two commercial consolidators have launched publicly, Clara-Pensions and The Pension SuperFund, with others considering following suit. The two existing consolidators operate with different structures. Clara-Pensions promotes itself as a bridge to buyout, with The Pension SuperFund a long-term run-off solution (see Figure 11).

Figure 11. Comparison of Clara-Pensions and The Pension SuperFund structure
Clara-Pensions The Pension SuperFund
Long-term objective Targets buyout for each scheme in 5-10 years Fund runs off in the long-term
Sectionalised? Yes. Each scheme placed in own ‘cell’ No. Single fund for all received schemes
Returns Clara investors only receive returns once buyout achieved Pension SuperFund investors receive regular returns, contingent on maintaining a minimum funding level. These returns are shared with members via a member "top-up"

Commercial consolidation is not equivalent to a buyout with an insurer underpinned by the insurance regime, but nor does it purport to be. It offers a different solution underpinned by the pensions regime (and the Pensions Protection Fund), with a higher level of risk than the insurance regime, but a lower (expected) entry cost.

Trustees will be faced with the question, is this cash injection today (along with the other benefits offered by commercial consolidators) better than the status quo, or other alternatives? (see Figure 12).

Figure 12. Key considerations when assessing a commercial consolidator to the status quo
Figure 12. Key considerations when assessing a commercial consolidator to the status quo

Figure 13. Increasing levels of consolidation in DB pensions

What are the benefits of consolidation?

Consolidation is not a new concept to the pensions industry. Figure 13 shows the various forms of consolidation that already exist in the pensions industry, from bundled advisers and fiduciary management through to DB master trusts and bulk annuities. As with any form of consolidation, commercial consolidators look to offer economies of scale.

For commercial consolidators these include lower running costs and access to a wider range of specialist providers. Greater access to investment opportunities provide the prospect of achieving better outcomes for members with a potentially improved risk/return profile, relative to the status quo. As entities built for the sole purpose of running pension schemes, there will be high-quality governance requirements with dedicated professional processes enabling more effective decision making and high-quality member service.

In addition, commercial consolidators also provide a settlement option, thereby providing certainty of costs for the sponsor. As commercial consolidators are not subject to the insurance regime, their capital requirements are expected to be lower than for an insurer, resulting in a lower price to settle liabilities (although with that, a lower level of security). This is particularly expected to be the case for schemes with a high proportion of deferred members, where the capital requirement under the insurance regime is more onerous.

Schemes should only transact with a commercial consolidator if it is in the interests of members. However, given the extra capital, both from the commercial consolidators backing each deal and the (accelerated) payment from the sponsor, member security could be improved relative to the status quo.

So what are the instances in which passing liabilities to a commercial consolidator may make sense for your scheme?

The original Green Paper covering consolidation issued in February 2017 noted small schemes would benefit the most from the economies of scale offered through consolidation. However, in the short-term, we expect commercial consolidators will need to focus primarily (but not exclusively) on larger deals as they look to build scale.

Scenarios where the commercial consolidation market could appear attractive are for:

  • Well-funded schemes (relative to a consolidator premium) with a limited value placed on the direct sponsor covenant
  • Schemes where a limited cash injection is available to pay to the consolidator, which is not sufficient to fund full buyout, and where the trustee has reservations about the sponsor’s future (long-term) ability to back the scheme or
  • Schemes which are large compared to their sponsor. Even if well-funded, should experience lead to significant funding level reductions the capital buffer provided by the consolidator may be more likely to absorb this shock than the sponsor.

What are the drawbacks?

The key difficulty that schemes must overcome is assessing the primary feature of consolidation: replacement of the sponsor covenant with a monetary amount. In particular, trustees will need to consider if the level of extra cash and capital provided are better than the (unknown) future covenant of the sponsor. This will need careful consideration with legal, covenant and actuarial input

Trustees will need to consider if the level of extra cash and capital provided are better than the (unknown) future covenant of the sponsor.

A transfer to a consolidator is not without risk, although neither is any other option available to a scheme (including the status quo). Schemes will also need to consider softer factors such as views of members if ties with the sponsoring employer are severed and, the current ‘early mover’ risk as the market is in its infancy, although this could present pricing opportunities for some schemes.

Examples of where a consolidator solution may not be appropriate include schemes that:

  • Can afford to buyout with an insurer (either now or in the short- to medium term). Consolidation should not be viewed as a lower-cost alternative to buyout and should only be considered where buyout is not affordable; or
  • Are well funded with strong sponsors and transfer to a consolidator is not expected to improve member outcomes.


The overriding principle for trustees of defined benefit pension schemes is to improve expected member outcomes within the constraints of the scheme, sponsor and regulatory framework. Commercial consolidation offers another solution for schemes, where appropriate, to meet this objective while also discharging the sponsor of its responsibilities. We expect the development of the regulatory framework to help kick-start this market and we look forward to seeing how it develops over 2020.

Next Chapter - Where next for the longevity de-risking market?

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Tom Ashworth
Willis Towers Watson

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