Article | 19/10/2018

Considering consolidation? Act now

The following piece is a reprint of an article featured in the Autumn 2018 PLSA Conference Special Edition of Pension Funds Insider magazine.

Consolidation is coming, make no mistake

At least two highly-credible and compelling consolidation vehicles have already signalled entry into the market. With many schemes struggling to meet the demands of a more onerous regulatory framework and sponsors looking for more creative solutions to remove volatility and risk, consolidation might hold the key for the future of many schemes. Early indications are that entry models differ, but by all accounts, schemes that are caught in the gap between being funded above technical provisions and below buy-out will be prime targets. Our analysis suggests that some 300-500 schemes could be suitable candidates.

For administrators, consolidation doesn’t resolve all of the complexities of servicing multiple entities, nor does it immediately provide an opportunity to standardise benefits. But, if operated effectively, it does offer a chance to address some chronic ills.

Why consider consolidation?

Consolidation provides for unified reporting, communications and management. Scale also plays a part in providing access to better self-service solutions, as well as generally lowering costs as the proportion of fixed overheads falls. A recent survey published by KGC highlighted the cost disparities in the administrator sector between large and small schemes, showing that smaller arrangements are paying up to 150% more for their administration service. If nothing else, consolidated administration can provide better value for money and give members access to better tools.

Entry into a consolidation vehicle, whatever form that vehicle takes, is fundamentally a transfer of risk - risk from a funding position and risk from underlying data and benefit provision perspective. The consolidator will take on the accountability for funding the scheme, as well as taking responsibility for making sure benefits are paid correctly. Schemes eyeing this solution should therefore carefully consider both points and especially whether someone else would be willing to accept the risk inherited in their records and operation.

Good quality data is important

The reality for many schemes which are now in the consolidator target zone is that discussion of buyout and the entry hurdles have been kicked down the road. Many schemes have held the mantra ‘buy-out isn’t realistically on the cards’ and so have decided not to tackle some of the sticky, and relatively expensive, measures to get buy-out ready. Be in no doubt though, consolidators set on success are placing good quality data and unified operations at the centre of their strategies. Schemes that have neglected data quality strategies will, therefore, find it harder and more cumbersome to gain entry.

Any scheme wishing to transact with a consolidator will still probably need to complete an exercise similar to that followed by most of the better quality buy-out providers. A root and branch review of benefits, including a full legal review of governing documentation, as well as a comprehensive data analysis with a rectification plan, will need to take place. Consolidators, just like buy-out providers, will need to match liabilities as closely as possible to the funding position – removing shocks and uncertainty from the benefit basis and underlying data is critical.

Be prepared for rejection

Any scheme or sponsor that might be looking to a consolidation option should not be under the delusion that it is a golden bullet to resolve decades of poor record management instantly. Expect and plan for a thorough inspection of your scheme’s history, data and rules. Schemes who have actively managed data and based their improvement strategies on a buy-out model will be best placed to quickly and cheaply access this new solution.

But be prepared for rejection. With a small supply side, some consolidators may choose to cherry-pick those schemes that are best prepared for a risk transfer and have done the groundwork.

Schemes who now think that consolidation might be a credible option should start by engaging with their administrator to look at data quality, member tracing, mortality screening and benefit assurance measures - this is going to be the first set of questions a consolidator will ask. Data improvement and benefit assurance is quite simply an inevitable requirement for all schemes. Act now, because the next innovative solution that could offer a risk transfer option is always going to be concerned with how much risk you’re actively managing and attempting to move.

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