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Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.

With defined benefit (DB) consolidation gaining momentum in UK pensions, we thought it would be worth finding out exactly which consolidation routes schemes are considering, as well as reviewing the trends within each possible option.
In our recent DB consolidation survey, we asked DB pension stakeholders which consolidation paths they are thinking of following. The results suggest that the consolidation industry is set for growth.
  • The Independent Trustee model already has a high take-up
  • 73% of schemes have an ultimate goal of buyout
  • Over 1/3 of schemes are considering a DB master trust
  • The number of schemes with fiduciary managers is expected to double

The significant period of volatility following the ‘Mini-Budget’ occurred after the closure of our survey. If we took a snapshot in the aftermath, we expect the timescales to buyout would have reduced but there may also be a change in what other consolidation options are being considered.

Can the buyout market cope with the additional demand? If not, will we see a spike in interest in master trusts? Could fiduciary management and investment platforms provide a solution to some of the problems we saw over the recent period? Will we see the first Superfund transaction?

We look in more detail at our survey results below.

Figure 1: Are you considering DB consolidation?

Source: abrdn DB consolidation survey 2022

Trustee Models

 

At a time when regulation on DB pension schemes is continuously increasing, the number of scheme members employed at the sponsoring company is falling, as many of those schemes are closed to new entrants and future accrual.

It therefore comes as no surprise that the most commonly implemented models on the consolidation spectrum are independent trustee and professional trustee. Our research indicates more growth in this area with a further 10% of schemes expected to implement both models over the long term.

Buyout / Buy-in

With insurance representing the ultimate discharge of risk for both trustees and sponsors, it's easy to see why it's the end goal for many DB schemes. While only 6% of respondents have a policy in place at the moment, the majority of those surveyed plan on implementing buyout in the future.

Figure 2: Are you aiming for buyout?

Source: abrdn DB consolidation survey 2022

Of these 73% of schemes with buyout as the ultimate goal, 14% planned to implement within the next 18 months and 14% within the next five years. With the recent trends of rising yields, will these schemes be closer to buyout than they initially anticipated?

With a significant increase in demand expected, limited capacity in the buyout market may restrict the ability of schemes to achieve this goal in the near to medium term – despite being fully funded on a buyout basis. This may require schemes to develop an alternative plan and implement measures that improve their attractiveness to BPA (Bulk Purchase Annuity) providers, such as data cleansing and investing in suitable assets.

Master Trust

Master trusts are designed to pool together small schemes so that they can benefit from economies of scale. It's therefore not a surprise that 65% of the large schemes surveyed said they are unlikely to implement. But for schemes who may be unable to access the buyout market, could a master trust form an interim step?

“The scale of changes in recent years drives me to the view that it's simpler to leave this to experts and for the company to exit the provision of pensions.”

DB scheme stakeholder

One of our respondents noted: "The scale of changes in recent years drives me to the view that it's simpler to leave this to experts and for the company to exit the provision of pensions"

Fiduciary Management

 

With significant volatility in liability-driven investment (LDI) markets impacting the wider investment strategies of pension schemes, we expect many trustees and sponsoring employers to review their governance models. Could the need for more efficient and quicker decision-making accelerate this move? With LDI managers tightening the yield movements which trigger a collateral call and reducing the timeframe to receive monies, more schemes may turn to fiduciary management to put in place the necessary improvements.