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Pension scheme consolidators - a success or failure in the future?

Pension scheme consolidators - success or failure?

Tom Seecharan, Head of Pensions Insurance, considers lessons from the past to find guidance on whether consolidation will be a success or failure in the future.

Tom Seecharan

Director of Pensions and Head of the Pensions Insurance team

KPMG in the UK


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Pension scheme consolidators - Back to the Future?, Illustration of clipboard with charts

There is a moment at the end of the 1985 film Back to the Future where the main character, Marty McFly, worries that he doesn’t have enough road ahead to reach the speed needed to travel through time. Marty’s worries are immediately eased by his eccentric companion Doc, who responds: "Roads? Where we're going, we don't need roads". 

Substitute the word “roads” for “sponsors” and this could be a conversation pension trustees could soon be having themselves.

Will pension schemes still need sponsors in a few years’ time? For some of the new breed of consolidation vehicles the answer would be a definitive ‘no’. My aim here is not to debate whether this is the right or wrong answer today, but use history as a guide as to whether consolidation will be a success or failure in the future. 

Consolidation is nothing new. Using economies of scale and pooling risk to better and more cost-effectively manage it is basic insurance. It’s been around for centuries. Pension schemes came later, but effectively do the same thing.

Even seeking to profit from consolidation is an established practice. This is exactly what insurance buy-out providers do. L&G started down this road 30 years ago, around the time Marty and Doc were imagining a future without roads. 

What has gone right and wrong in those intervening years? 

What has gone right?

  • Strong and stable regulatory environment – the regulatory environment for bulk annuity insurers has been a success (so far) in providing a high degree of comfort that pensions will be paid as promised. This regime has been made stronger and more sophisticated over time in response to various changing demands and public expectations and hasn’t yet failed.
  • Lots of competition – a stable environment as well as high and growing demand from schemes and sponsors has led to a great deal of choice for customers which leads to great pricing, commercial terms and innovation to solve schemes’ specific requirements.
  • Trustee comfort – trustees have generally become more comfortable with the insurance regime and the available providers as time has gone on and buy-ins and buy-outs have become mainstream and simple to transact.

What has gone wrong?

  • Too little competition – in some years, there has been insufficient true competition between providers, which leads to higher prices and potentially less attractive commercial terms.
  • Uncertain regulatory environment – where there is uncertainty around the regulatory requirements, this could leave scope for consolidators to make assumptions which are not robust in all market conditions. This could manifest itself in good pricing at the outset, but the potential danger of promises not being met in unexpectedly poor market conditions. In the insurance regulatory regime, there are in-built protections to encourage insurers to consolidate under such circumstances before this risk materialises. Whether, or how, this might happen is less clear for a consolidator vehicle.
  • Too much demand – In the event of a sustained positive market (in which consolidation becomes a normal risk control measure that’s widely available and affordable for many schemes), we could quickly find schemes don’t have the capacity they need in the form of staff or ability to find the right assets. As with today’s bulk annuity market, this could reduce access to the market for some schemes. It could also lead to higher pricing.

Sadly, I don’t have a time machine to definitively answer these questions. However, by applying the lessons that have made consolidation such a success in the past will mean we have equal  success with a new type of consolidation – that provides more choice and greater security for pension scheme members – in the future. 


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