Pensions are back in the spotlight following recent moves to shake up the UK pensions landscape to boost investment in the economy, as well as ensure schemes are run more efficiently.

With proposed changes for greater consolidation in the UK pensions market for Defined Benefit schemes (DB), finance directors – often responsible for the management of company pensions schemes – have more options available, but this can often lead to confusion.

In his July 2023 Mansion House speech, Chancellor Jeremy Hunt said the government would set out “plans on introducing a permanent superfund regulatory regime”. Today, the UK is on a path towards fewer, larger, well-managed pension schemes with the aim of delivering better outcomes for savers and greater investment opportunities for the UK economy. 

There are two types of consolidators emerging. Getting lots of attention from government and press are financial consolidators or superfunds, such as Clara pensions, which is overseen by the Pensions Regulator. Clara Pensions completed its first pension superfund transaction in November last year. The idea behind this kind of consolidation is that the sponsor pays a premium upfront and then the employer can ‘walk away’.

The other type of consolidator is one where the employer remains legally responsible for the scheme, but it can be run potentially more cheaply and efficiently.

“If you as an FD really want to get the scheme off your books and remove that financial liability, then it’s the financial consolidators that you should be looking at,” says Andrew Goddard, a partner at pensions expert Isio, which runs one such operational consolidator, Enplan.

Greater scale aims to bring better economic benefits through the ability to invest in a broader range of diversified assets and cost savings, but the reforms should also improve governance standards and innovation, according to the Pensions Regulator.

The regulator says it is supportive of the pensions plans announced in the government’s Autumn Statement because the UK has a fragmented DB pension schemes landscape, with more than 5,000 schemes representing some nine million memberships. 

It wants members in small schemes to benefit from the “security that scale and appropriate risk management provides”, which is why it welcomes plans for the establishment of a public sector consolidator by 2026 and the commitment to bring forward superfund legislation in the future.

Goddard says: “Consolidation is a good thing. There are still thousands of DB schemes out there. Most of them are small, below £100m. Most of them can probably save money and improve governance standards through using some of these different options that are already out there. Other options are still embryonic. And one of them is still just a glint in the Chancellor’s eye.”

Realistically, the proposed superfund will only really benefit very large company pension schemes, which Goddard says figure in the hundreds. So, what are the available options for FDs in charge of smaller schemes?

Goddard says: “The thing to be wary of is that only one deal has happened to date, so it’s still very new. It’s a more complicated process than just joining an operational consolidator. There’s not much market experience of them yet, despite the government trying to get them off the ground for a few years now. 

“I think for the right schemes, a financial consolidator is a very good answer. Superfunds present an attractive solution for the right kind of scheme.”

There are however strict gateway tests required to transfer a scheme into a superfund.

Mike Smith, board director at Business Experts, points to options such as master trusts: “These provide a framework where multiple employers can operate within a single, professionally governed scheme, benefiting from economies of scale.

“For FDs, the responsibility as their company’s scheme sponsor is significant. They must carefully manage the risk, balancing the scheme’s investment risks and the longevity risks. Assessing the scheme’s funding level is also critical, ensuring the company can sustain its contributions both now and in the future,” he says. 

FDs must carefully navigate a complex environment, weighing the security and sustainability of a scheme against a company’s financial health and future commitments. This involves consideration of the impact of various consolidation options on current pension liabilities and future funding requirements. 

Experts say that engaging with scheme members and trustees is crucial, and toritically consider the costs and the timescales for whichever solution you opt for. One positive is that schemes are currently much better funded than they were 18 months ago thanks to the big rise in gilt yields at the end of last year. But another round of shaky economy like that the UK experienced under the mismanagement of former Prime Minister Liz Truss cannot be ruled out.