Stoneport’s head of covenant, Jacqui Woodward, explains why the UK’s defined benefit sector could suddenly experience an increase in consolidation, similar to that experienced in other countries such as Australia, the Netherlands and Germany.
The strain on businesses is a central part of that, and the Pension Protection Fund confirmed in January that it will be adopting a year-by-year approach to setting the levy rules, to give it additional flexibility to respond to the impact of Covid-19 on sponsors as much remains uncertain at the present time.
So what can the UK take from other countries when it comes to defined benefit consolidation?
We are seeing increasing levels of consolidation in the UK DB pensions market, with the superfund players edging closer to their first deals and growth in the DB master trust market
We are seeing increasing levels of consolidation in the UK DB pensions market, with the superfund players edging closer to their first deals and growth in the DB master trust market, alongside increasingly innovative solutions.
The aims of this are clear: leverage economies of scale to reduce costs and improve governance. If the UK were to follow in the footsteps of Australia and the Netherlands, then we could be about to see a seismic shift in the UK’s DB landscape.
The international experience
Australia was perhaps the first country to experience significant consolidation of its pension funds, fuelled by the growth of its master trust market in the 1990s, when it was possible to convert from DB to defined contribution relatively easily, or into something equivalent.
The total number of corporate DB plans fell from 4,188 in 1997 to 30 in 2016, according to data from Willis Towers Watson.
In the Netherlands, there were more than 1,000 pension funds a decade ago, falling to around 230 currently.
This figure is expected to decline further, and research has indicated that around a third of European pension schemes are planning to fully consolidate with another scheme over the next few years.
The same movement towards consolidation is being seen in Germany, albeit to a lesser degree, with the number of Pensionskassen (pension funds) falling from 158 to 138 between 2004 and 2016.
Further falls are expected due to the prolonged low interest rate environment and the increasing regulatory burden. Research from Willis Towers Watson in 2018 showed that three-quarters of German Pensionskassen professionals are expecting further consolidation.
Will the UK follow suit?
Can we expect to see such fast levels of consolidation in the UK? I would expect such a shift would be welcomed by the Department for Work and Pensions and the Pensions Regulator, particularly for smaller schemes.
These stand to profit most from the benefits of scale available from consolidation: improved governance, better member communication and engagement, and access to better investment opportunities and reduced management fees.
The UK DB pension fund market has long been viewed as too fragmented.
In its 2016 interim report, the Pensions and Lifetime Savings Association recommended that work be undertaken to explore the potential for scheme consolidation.
While there has been a clear shift to closing DB schemes to new entrants and/or future accrual in the UK, we have not seen a very significant move towards consolidation yet.
The total number of DB pension schemes fell from 7,400 in 2008 to 5,450 in 2018 — although this was largely due to employer insolvencies and scheme wind-ups, rather than consolidation.
The Pensions Policy Institute predicted in 2019 that the number of DB schemes would fall to 4,000 by 2030.
This seems a relatively modest prediction given the innovation we are currently seeing in the market. The reality is a seismic shift could be on its way.
Jacqui Woodward is head of covenant at Stoneport Pensions
