Pension consolidators are emerging as an effective solution to manage defined benefit pension plan risk.

By Tom D. Evans, Victoria Sander, David J. Walker, Shaun M. Thompson, Paul R. Lawrence, and Catherine Campbell

As inflation soars and market uncertainty creates additional volatility for UK defined benefit pension (DB) plans, PE firms now have a new option at their disposal to manage portfolio company pension risk — to transfer a portfolio company’s DB plan to an external consolidation vehicle.

A novel solution?

The first pension consolidator has emerged in the UK market, offering PE owners the option to transfer portfolio company DB liabilities. In December 2021, the UK Pensions Regulator cleared Clara-Pensions as the first pension consolidator, or “superfund” (for the purposes of companies transferring responsibility for DB funding obligations to a third party consolidator) paving the way for the fund to absorb UK DB assets and liabilities. We expect other superfunds to follow, widening the options for managing DB liabilities for PE owners.

This method of managing pension risk is especially welcome following the introduction of the Pension Schemes Act 2021, which was a game-changer for companies that sponsor a DB pension plan, and any shareholder of such a business. The new regime grants enhanced “moral hazard” powers to the Regulator and provides for criminal liability (punishable by up to seven years’ imprisonment and/or an unlimited fine) for acts or omissions deemed detrimental to a DB plan in circumstances where appropriate mitigation has not been provided. Shareholders of a portfolio company that sponsors a DB plan thus face greater theoretical risk from the Regulator’s powers.