“The publication of the DWP’s consultation today shows the momentum that continues to build around consolidation in DB.
“Commercial consolidators will lead to better outcomes for many DB members than the current environment. If they can be the trigger that persuades corporates to pay a significant cash injection into their DB scheme in return for a clean break, then this will lead to better funded schemes, a vast improvement in member security, and far lower risk to the PPF. There are a cohort of schemes that are already close to buy-out (we estimate 12% of the FTSE350 could already buy-out). Consolidators give the opportunity for the next wave of schemes to become fully funded on a low risk basis, where the employer can afford the cash injection (we estimate 9% of the FTSE350 could transfer to a consolidator with less than 1 month’s earnings). Getting the clean break in exchange for the cash injection gives a real incentive to employers to agree to do this.
“However, consolidators don’t fix the problem for schemes where the employer simply can’t afford to fund the deficit, and so we could be left with a cohort of poorly funded schemes with weak employer covenants for which the PPF may be the inevitable outcome. Yet, there are still two green shoots for these schemes. Firstly, consolidators will reduce the risk to the PPF, thereby improving the ability of the PPF to absorb these remaining schemes with the real affordability constraints. Secondly, the evolution and accreditation of DB Master Trusts will enable these schemes to significantly reduce running costs and access effective investment strategies by transferring to a Master Trust, therefore improving their ability to bridge the deficit over time, and potentially eventually become sufficiently well-funded to go into a commercial consolidator.
“We welcome the ‘gateway’ proposal that means schemes within 5 years of buy-out are ineligible for a superfund. Schemes in this position should be aiming for gold plated buy-out. The current tax rules also make the economics of a consolidator transaction inefficient for well-funded schemes where there might be a need to transfer scheme assets into the capital buffer. We also supportive of the stochastic approach to testing funding of commercial consolidators. Our analysis has shown that some consolidators do lead to a greater than 99% chance of members’ benefits being paid in full, and so setting the bar at this level is realistic
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