What might the govt’s regime for commercial consolidators entail?

The commercial consolidators themselves stress that there is nothing preventing them from operating in the existing pension scheme environment, which is basically true. 

However, experts stress the need for an appropriately regulated market and insurers point out that there needs to be a level playing field, so there is not scope for regulatory arbitrage. Trustees also want a well supervised regime that they and their members can rely on. 

There is, therefore, a range of reasons why more robust requirements may be needed:

• Commercial consolidators potentially have far more members than most existing schemes, so more individuals (and voters) are at risk if they fail;

• Commercial consolidators potentially represent a greater risk to the Pension Protection Fund in the event of a catastrophic event;

• Commercial consolidators have no trading sponsor to support them;

• These consolidation vehicles are expected to have a more commercial outlook, with trustees employed by a business whose primary aim is to make money out of the scheme.

So, what might an authorisation regime look like? 

Expect enhanced requirements 

There is an argument that it should look like the insurance regime, as the principles of consolidating schemes under a commercial provider are similar. 

In practice, though, the commercial consolidators are not insurers, so I expect it will start with the occupational pensions regime and build from there.

It certainly needs to consider everything that existing DB schemes need to deal with and, given their scale, they should be measured against best practice rather than minimum standards.

I predict we will see enhanced requirements in areas such as funding, investment, governance, and possibly administration and communication standards.

How this is applied will need to work for the very different approaches of the two commercial consolidators who have launched so far, as well as other potential models we have not yet seen. 

Covenant assessment is likely to be replaced by some sort of assessment of the commercial consolidation business itself. 

And like the new banking regulation I expect them to need a ‘living will’. This will explain the exit strategy if a commercial consolidator decides to leave the market, and regulation might include triggers for PPF entry. 

DC master trust model could prove useful

Rules simply do not exist in these areas. The regime for defined contribution master trusts would be a good model to look at in this respect, and with the benefit of the Pensions Regulator having gone through that, I would expect the process for DB consolidators to be better as a result.

Finally, given the proposed changes in how the largest schemes are supervised by the regulator, I would expect commercial consolidators to be subject to greater regulatory focus, perhaps with ongoing mandatory engagement with the regulator as a condition of authorisation.

Any regulation is more likely to bite in the longer term, as the market grows

Many of the above issues are already reflected in how the commercial consolidators plan to run themselves.

After all, they have a new product to launch, and getting potential clients on side means demonstrating best practice. Showing that they have good controls around funding, investment and administration will be essential to bring in clients.

In my view, any regulation is more likely to bite in the longer term, as the market grows, to ensure that commercial consolidators continue to deliver on the promises made at outset.

Overly strict regs may hinder progress

There is also a risk that regulation will not come in for some time. The regulator may find it difficult to implement the regulations retrospectively on commercial consolidators established in the interim – witness the issues with existing DC master trusts as that authorisation is being brought in.

Finally, while a lot of the above are technical points, I expect a significant influence on how the authorisation regime develops will be political.

Ten years ago, when similar consolidation was floated (albeit through a different mechanism) there was considerable hostility towards the concept from the existing market, as well as regulators and government. 

The resulting requirements effectively killed that business model. Today’s environment is very different, and there is a broad consensus that commercial consolidators fill a gap in the market. 

A word of caution, though: if the commercial consolidation regulatory regime is too strict, it could prevent this fledgling market from getting off the ground in the first place.

Paul McGlone is president of the Society of Pension Professionals and partner at Aon