Aon assesses viability of commercial consolidators

Aon has assessed the benefits and shortcomings of transferring into defined benefit commercial consolidators, following the government consultation in December last year.

In its DB Consolidation Brochure, Aon outlined that schemes may want to transfer to commercial consolidators, such as Clara-Pensions and the Pension SuperFund, as it discharges liabilities and enables schemes to wind up at a potentially lower cost than purchasing annuities.

It also said that they can provide greater security and commercial consolidator trustee boards include professional trustees, which can provide strong governance.

However, Aon warned that there are some challenges that need to be overcome.

It cited reputational concerns, due to its new nature and the lack of track record, the administration experience and long-term financial strategy has not been assessed.

Furthermore, it can be difficult for trustees to judge whether moving members into a commercial consolidator could provide greater security than their members' current situation.

Trustees will also have to be sure that the sponsor can afford consolidator entry but cannot afford a full buyout, as it said that “it is difficult to see why the scheme should be transferred to a consolidator rather than the scheme simply being run off over time or bought out”.

Commenting on the research paper, Aon head of UK retirement policy, Matthew Arends, said: “Consolidation is a wide term which covers a number of options – most of which have been around for a while.

"But the Department for Work and Pensions’ 2018 White Paper and subsequent consultation highlighted the idea afresh and introduced the idea of both commercial consolidators and a potential framework for their authorisation and regulation.

“The answer for each scheme will depend on its own objectives, goals and circumstances, but overall we think that a focus on improving the efficiency and governance of DB schemes is most welcome and that the resulting focus on getting to the endgame for a DB scheme is also an important development.”

Overall, Aon expects commercial consolidation to be the right answer for only a “small proportion of schemes”, although a “significant market” could be created.

Aon’s paper also discussed some of the other options for DB schemes, including buyouts, buy-ins, DB master trusts and mergers.

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