Fairs: Commercial consolidators pose new challenges for regulator

In its DB white paper, published earlier this year, the government said it wants to encourage and facilitate commercial consolidation.

What’s the risk of being an early adopter?

Sue Applegarth, Saul Trustee Company

Since then, two commercial consolidators have sprung up in the form of Clara Pensions and the Pensions SuperFund, with more expected to appear.

Joe Dabrowski, head of DB, LGPS and standards at the Pensions and Lifetime Savings Association, told Pensions Expert that between six and 12 organisations are rumoured to be contemplating entry into the market.

Meanwhile, the Department for Work and Pensions is working on an authorisation and supervision regime to apply to the new ventures.

Legislation will take time

Speaking at the PLSA’s annual conference, the regulator's executive director for regulatory policy, analysis and advice David Fairs said the watchdog is “very supportive of DB consolidators, but we have to recognise that there are some new challenges and new risks that go alongside those”.

At the conference, pensions and financial inclusion minister Guy Opperman had outlined his intention to deliver a “very substantial” bill addressing multiple areas of pensions regulation in the summer of 2019.

He said that he is “trying to kick as many consultations out of the door of the DWP” and have them concluded by Christmas, emphasising his support for a number of projects, including DB consolidation.

But if the consultation paper creates the need for legislation, there will still be a significant time lag before that is implemented.

“He’s hoping for a pensions bill, but realistically it’s going to be two years before that bill comes into effect,” Fairs noted.

Meanwhile, the regulator is “very conscious” that Clara and the PSF are already “open for business under the current regime, and therefore that presents us some challenges”, Fairs said.

He highlighted that the watchdog has had regular contact with the two consolidators, and has made it very clear that when they do their first transaction, the regulator would expect them to come for voluntary clearance.

Consolidators could have significant impact on market

“Really, what we’re looking for is member detriment – are members going to be no worse off than they were previously?” Fairs said.

The new revised DB funding code will be out for consultation in spring with a draft code due in autumn 2019, according to Fairs. This will take DB consolidators into consideration.

The effect commercial consolidation of DB funds will have on the wider marketplace is also a consideration.

Speaking to Adam Saron, co-founder and chief executive of Clara Pensions, and the Pensions SuperFund’s co-founder and chief executive Luke Webster, both on the panel, Fairs said: “If both of you are successful then presumably other entrants would come into the market, and so from that point of view you could be very disruptive in the marketplace.”

He added that the regulator is thinking about what may happen if that comes to pass.

Who goes first?

For now, early adopter nerves may be holding back inflows to the new DB consolidators – with trustees nervous to be the first to jump.

Sue Applegarth, chief executive officer at SAUL Trustee Company, said there would be three main factors for trustees to take into account if a scheme were to consider moving to a consolidator.

Firstly, it is important for trustees to ask, “Could this actually be a better option for my members, could it be a more secure option for my members?” she said.

Secondly, trustees need to think about what the risks are of going down this particular route, and how easy will it be to mitigate those risks.

Trustees should also consider whether “this [is] the right time… or should I wait a bit? What’s the risk of being an early adopter?”

Responding to a question from a member of the audience, Saron agreed that early adopter nerves are “clearly an issue”, adding that “early adopters get a benefit in price”.

He said: “We understand clearly that in the early years… you expect to lose money in any business that’s growing. Our capital providers are there to take that loss and not to expose the early adopters to it." Clara has not yet revealed the identity of its backers, but has promised to do so in the coming months.

Webster said that, in terms of the PSF, “for those early adopters, the economic proposition would be very different and I think it would be extraordinary to classify it as anything other than a massive improvement in the scheme’s security and conditions”.