As a trustee, is it your place to raise consolidation?
Hear from Trustee Director Alan Baker, further to the Pensions Management Institute’s Trustee Fortnight and panel entitled “Impact on the markets of different COVID-19 exit strategies”
I suspect in most cases consolidation is likely to be something raised by the sponsor.
I was asked, in the context of this panel, if as a trustee I would ever consider raising it.
The answer is a clear maybe.
Regardless of who puts the “consolidator option” on the table, there are some important questions to ask:
- Is consolidation the best outcome for the members and ensuring accrued benefits were paid in full?
- To consider consolidation there would have to be genuine concerns that there was a risk they wouldn’t be under existing arrangements.
- Does my actuary support this?
- The move would ultimately be a bulk transfer without consent so the actuary would need to agree that the new benefits were equivalent to what members have now.
- What does my covenant advisor think?
- The key area of advice in my view would be around the covenant and it’s a challenging question: comparing two very different things…
- Is my lawyer happy with the structure of the solution, including:
- What would the transaction process look like?
- What could go wrong now?
- What could go wrong in the future?
- What do we need to have in place to proceed if we want to?
- Is the underlying administration fit for purpose/of an appropriate standard?
- How does the investment solution really work - is there any dependence on specific assets / market conditions (e.g. credit spreads)?
- What scale does the consolidator need to achieve to get critical mass (and, importantly, what happens if they don’t)?
- Regulatory regime development – how might this change in the future?
- What other options are available: alternatives that bring in additional capital but don't break the link with the sponsor. These alternatives have elements of overlap with full consolidators but retain that covenant linkage.
- Have we considered other ‘consolidation’ options (for example):
- DB Master Trust
- Fiduciary Management
- Corporate Sole Trustee
All of which provide some level of consolidation of assets or governance.
In context of the end-game we discussed the key differences between the current consolidator options with Clara-Pensions Founder & CEO Adam Saron and Pensions Super Fund CEO Antony Barker.
The two current consolidators in the market have some distinct differences, which are widely covered elsewhere, so we won’t go into here. But understanding the different offerings in this new market will be an important building block of a trustee’s understanding in this area.
Clearly now we’re seeing movement on the ‘Superfunds’ regulatory framework things are actually starting to happen. Which is exciting. Personally, I'm very supportive of seeing more options for trustees and believe consolidation is a very legitimate approach for some schemes.
COVID-19 has clearly put pressure on a number of employers and I agree with Adam's comment that it has likely increased the size of the market for consolidators.
Please note that Michael Chatterton represents LawDeb on the trustee board of Clara.
Alan Baker doesn’t have any involvement in that appointment.