Consolidation of defined benefit pension schemes
Produced in partnership with Camilla Barry of Macfarlanes LLP
Consolidation of defined benefit pension schemes

The following Pensions guidance note Produced in partnership with Camilla Barry of Macfarlanes LLP provides comprehensive and up to date legal information covering:

  • Consolidation of defined benefit pension schemes
  • Origins of DB consolidation
  • DB consolidation—precedents
  • The PLSA’s DB Taskforce
  • Towards a regulatory regime for DB consolidators
  • Defining DB consolidators
  • Proposals for regulation of DB consolidators
  • The Pensions Regulator’s guidance on setting up and running a DB consolidator
  • The Pensions Regulator’s guidance to trustees
  • The Pensions Regulator’s guidance to employers
  • more

At the core of DB consolidation is the idea that scale matters, with the aim being to harness the benefits of scale within the occupational pension scheme regime to enhance the likelihood of scheme benefits being paid.

Governance and administration costs include fixed costs and larger schemes benefit from lower per capita costs. Larger schemes have more assets to invest and can therefore allocate larger pools to different types of investments, including illiquid investments, gaining access to a wider range of investments and better diversification. The law of large numbers applied to mortality and other risks increases the likelihood that these will be consistent with average experience. As such, the pooling of risks reduces those risks, and the capital required to be held in respect of such risks.

Technically, DB consolidators are not materially different to other occupational pension schemes save that the employer covenant is effectively replaced by a fixed capital buffer. The risks associated with the employer are removed but capital is limited and the valuation of the liabilities on entry to the superfund therefore needs to be very prudent.

A robust regulatory regime is essential to ensure that superfunds are well run and provide an affordable but sustainable option. As the regulatory regime is in development and new models of DB consolidators may yet emerge, the regime is likely to evolve.

The