Defined Benefit Pension Consolidation

There was much debate throughout last year on defined benefit (DB) consolidation as a way to protect DB members, especially those in poorly-funded or poorly-governed pension schemes. The government believes commercial consolidator vehicles will help give more clarity to members.

The DB pensions industry has long lacked clarity over what a good outcome on the security of members’ benefits looks like. The 2018 Pensions White Paper talks about the need for end-game funding plans that increase the security of members’ benefits. Transferring to a consolidator vehicle is a potential end-game option.

Consolidation will involve the trustees agreeing to ‘sell’ the sponsor’s obligation to support the scheme (the covenant) in exchange for a substantial upfront capital injection. Whilst the funding level may be substantially improved, and ongoing governance would be transferred to a specialist management team, recourse to the corporate sponsor would be relinquished.

Whether consolidation is in the best interests of members will depend on the relative impact on the employer covenant, and what other end games may have been feasible for the pension scheme (e.g. buyout). The covenant structure of the proposed consolidation vehicles will be complex and new for many trustee boards. We have been discussing with the current consolidators to understand their proposed financing and covenant arrangements, and have significant experience of transactions which have involved exchanging traditional covenants for such ‘synthetic arrangements’.

If your scheme is considering a transfer to a consolidator, we are expertly placed to provide you with clear guidance on factors the trustees will need to consider.


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