Consolidators looking to profit from pensions look to have government support, says the Society of Pension Professionals' Paul McGlone, but those schemes in most desperate need of access to scale are unlikely to make attractive business.
The development of this market takes me back to 2007, when similar things were happening, but in a very different way.
At that time investors were buying companies, including their pension schemes, and then selling the operating business so that they could retain, and profit, from the pension scheme.
Not only are larger schemes lucrative financially, the consolidators need scale fast or their backers may pull the plug
In 2007, large parts of the pensions industry were up in arms at these developments, as were politicians, unions, trustees and members. The Pensions Regulator was given new powers, and the practice appeared to die out.
Government now behind superfunds
So, 10 years later, what is different? The challenges for sponsors are very similar, as are the financial risks and opportunities – the scepticism from parts of the industry also remains.
Even some of the financial backers are the same individuals who were around in 2007. The big difference is the attitude of government.
It has apparently concluded that consolidation of schemes, as part of an attempt to deal with the UK's legacy defined benefit deficit, is not only acceptable, but is desirable – and sufficiently desirable that commercial providers making a profit should be encouraged rather than discouraged.
That change in attitude then flows through to the regulator, whose objectives are now more difficult than ever.
The regulator’s pendulum of pension protection has swung between being Pension Protection Fund-friendly, company-friendly and trustee-friendly in recent years, with its current focus resting around protecting the PPF and members from unscrupulous sponsors.
Add to that objective the demands of authorising mastertrusts and keeping tabs on new commercial consolidators, and in the short term (i.e. until consolidation generates a smaller number of schemes to regulate) the regulator’s role looks set to get even more challenging.
Nothing changes for small schemes
But the factor that nobody seems to be talking about is scale. The biggest benefits of consolidation accrue to the smallest schemes – the more than 4,000 schemes that make up 80 per cent of DB schemes but less than 10 per cent of liabilities, with average assets of around £35m.
Those schemes appear not to be of interest to the commercial consolidators. Not only are larger schemes lucrative financially, the consolidators need scale fast or their backers may pull the plug. Micro schemes just will not provide that, so will have to wait.
So what for those smaller schemes? Good options for consolidation do exist, in the form of fiduciary managers, sole trustees and mastertrusts.
But the idea that the white knight from the commercial consolidator will come riding to the rescue over the next few years will, I think, remain a fairytale.
Paul McGlone is president of the Society of Pension Professionals and partner at consultancy Aon
