The UK government is consulting the pensions industry on consolidating small defined benefit pension schemes to “enable more effective investment performance”.
Large DB pension schemes have been a mainstay of the private equity limited partner landscape and if a consolidation process allowed smaller schemes to access more sophisticated investment strategies, it could prove beneficial to fundraisers.
A Government Green Paper released last week said “…the introduction of a Superfund Consolidator… has the potential to meet all of the aims for consolidation [including] improved efficiency and governance and better investment performance…”
At present, there is £1.5 trillion ($1.84 trillion; €1.75 trillion) of assets held in DB schemes on behalf of 11 million people in the UK. However, this is distributed between 6000 schemes, many of which are too small to run their investments in an efficient way.
The paper referred to findings from The Pensions Regulator found that among smaller schemes many rely unquestionably on the advice they receive; 50 percent ‘rarely’ and 36 percent ‘never’ disagree with external advice on investment strategy. The paper also noted Financial Conduct Authority findings that smaller schemes are less able to bargain on management fees due to lack of resource and knowledge.
In addition, the Paper notes that an increasing number of the schemes are running unsustainable funding deficits in the wake of the global financial crisis.
Consolidation has already begun on a limited scale in the UK. Private equity veteran Edi Truell has formed the advisory board for the £10 billion partnership between the London Pensions Fund Authority (LPFA) and the Lancashire County Pension Fund (LCPF).
The consultation closes on 14 May 2017.