Pensions are a huge and growing market within the UK, with schemes such as defined-contribution and defined-benefit seeing considerable growth in both membership and value each year. Overall, these schemes are currently thought to account for over 90 per cent of total benefit spend within the UK.
However, despite the ubiquity of pensions in virtually everyone’s lives and the huge value inherent in these funds, M&A has often been sluggish within the pensions market and, as a result, it has long been a highly fragmented sector.
However a shift has begun to happen as dealmakers have finally become aware of the scope for consolidation within the market and the appetite among savers for more efficient, well-managed funds has grown. Dealmaking activity in the pensions arena has picked up pace in a trend that looks set to accelerate.
Growth begins to attract interest
The key thing that is arguably driving M&A interest in the pension schemes market is the huge and growing value that they contain. This factor arguably made it inevitable that the pensions sector would see an M&A boom at some point.
This now seems to be taking place, with rising membership, and the resulting increase in contributions, meaning that pensions are bigger and more valuable than ever. Looking at just one sector of the market, membership of defined contribution schemes has grown at a huge rate over the past few years.
In 2012, membership of non-hybrid defined contribution schemes stood at just 270,000. By March 2021, however, this had grown to over 18.6 million. According to recent figures from the Pensions Regulator, defined contribution master trusts in the UK currently hold approximately £78.8 billion in assets.
Moreover, this growth is set to continue on a global scale, with membership of defined contribution schemes thought to be growing at an annual rate of 6 – 8 per cent, both across Europe and in the United States.
Looking at the wider pension market, the UK is a global leader. In 2021, the UK was calculated to be the world’s third-largest pension market (behind the USA and Japan), with assets totalling more than £2.5 trillion representing 6.8 per cent of worldwide pension assets.
Consolidation picks up pace in fragmented market
Just as membership has increased in the pensions market, consolidation has also begun to pick up pace rapidly, with the heavily fragmented sector offering a huge scope for dealmakers to target acquisitions at scale.
In 2011, the number of defined contribution schemes in the UK stood at a massive 45,150. However, by 2020 this figure had fallen to just 28,360 and, by the end of 2021, this had fallen further to 27,700. From 2020 to 2021, meanwhile, the overall number of master trusts fell from 38 to 36.
While many schemes will doubtless have collapsed and been wound down over the course of the decade, the contraction from 2011 to 2021 also illustrates the high degree of consolidation that has been occurring, and continues to occur, in the pensions sector.
With dealmaking continuing to grow, there are several prominent firms currently in the market with the appetite and financial backing required to rapidly acquire and consolidate pension fund portfolios and master trusts.
In August 2021, pensions and protection consolidator firm Chesnara dubbed itself a “patient” buyer, a reference to the fact that the firm hadn’t made a UK acquisition since buying Direct Line Life Insurance for £39 million in 2013.
Over recent years, the company had focused more on the Dutch pensions market, in which consolidation has been even less developed than the UK. At the time, incoming Chesnara CEO Steve Murray said: “Just because we haven’t bought a firm in the UK recently, doesn’t mean we don’t like the UK. M&A is a very important part of our strategy. We are very open-minded about the strategy, and our movements are a reflection of where the attractive prospects are.”
The company’s patient approach enabled it to build up an acquisition war chest of £120 million by 2021 and, in September last year, the firm pounced to make its first UK acquisition in eight years. It acquired Sanlam Life & Pensions UK, the pensions arm of Sanlam, for £39 million – a 19 per cent discount on the division’s estimated £48 million value – in a deal that brought with it around 80,000 policies and approximately £2.9 billion in assets under administration.
Outgoing Chesnara CEO John Deane said: " Sanlam Life & Pensions business is well aligned to Chesnara’s acquisition strategy and will be integrated with our existing UK operations. We believe that the market prospects for further acquisitions across our target markets remain positive and we continue to be confident in our ability to finance and execute such transactions on attractive terms for both vendors and our shareholders.”
Since the Sanlam deal, Chesnara has continued to demonstrate its dealmaking intent. In December 2021, the firm hired Phoenix M&A boss Sam Perowne to head its M&A activity, with CEO Steve Murray saying that Perowne’s “capabilities in M&A, wider strategic development and investor relations strongly align with our focus at Chesnara and will help ensure we are well placed to pursue the acquisition opportunities we continue to see.”
Finally, last month the company completed a £200 million debt issue, the proceeds of which have been earmarked for future value-adding acquisition opportunities.
Not all consolidators within the pensions market are as well-established (or as patient) as Chesnara, however, and there are plenty of younger firms using M&A to tap into rapid growth. One such company is global savings and investment tech platform Smart Pension.
Founded in 2014, Smart Pension had grown to over £100 million in assets under management (AUM) on its platform by 2018. However, in the three years since then, the company’s growth has increased exponentially.
In December 2021, Smart Pension announced that it had passed £2.2 billion in AUM, growth of over 2,000 per cent since it passed the £100 million AUM milestone. This has been possible thanks to a strategy combining organic growth and strategic M&A.
The company has acquired seven UK-based pensions master trusts, as well as a technology partner, and has shown no indication of pausing its acquisitive activity. The group has hired Paul Toone as Group Director of M&A to oversee the company’s global M&A activity.
Paul Toone commented: "Smart's technology prowess and proven record in disrupting the retirement space puts us in a unique position to deliver value. The growth in the business so far is extremely compelling, and we are very focused on our core goal: offering the very best technology to improve the lives of retirement savers around the world.”
“Our trajectory, combined with our international expansion, is driving an excellent acquisition pipeline. We are actively looking for further possibilities to deploy capital in M&A to bring members and assets onto our technology platform."
Upstarts look to shake-up industry
Smart Pension’s success also points to another factor driving M&A growth in the pensions sector: tech and digital disruption. Increasingly, new, more technologically-adept, companies are making acquisitions as they seek to shake-up the status quo.
Many pension schemes have come in for criticism over recent years for being poorly managed and for failing to maximise the potential of the funds that contributors put in. Even at a time when membership of pension schemes is increasing rapidly, the assets of members have not kept pace, with average assets dropping 70 per cent since 2012 and currently standing at around £5,200.
Hargreaves Lansdown’s Senior Pensions and Retirement Analyst Helen Morrissey says: “Not everything is booming in the DC (defined contributions) market. Average pension pots still need a boost. There might be many more people saving into a pension, but overall they are saving less — the vast majority of people won’t be saving more than the current auto-enrolment minimum of 8 per cent.”
This sluggish performance has not only encouraged industry stalwarts to capitalise through consolidation, it has also led to the emergence of new players looking to fundamentally disrupt the market and tap into latent appetite for more efficient, digitally-enabled pensions.
One of the most prominent of this new generation of disruptors is Cushon, a workplace savings fintech that offers customers highly-personalised pensions and savings solutions through a mobile app. Founded in 2014, the company aims to lead a “tech revolution of UK pensions”, operating a net zero investment strategy and offering savers a range of eco-conscious investments.
In January 2021, Cushon announced the acquisition of the Creative Pension Trust auto-enrolment scheme. The deal was Cushon’s third master trust acquisition – following deals for the Salvus master trust and Northern Ireland's Workers Pension Trust – and took the company to £1.7 billion in AUM and over 400,000 customers, more than doubling its size and making it the UK’s fifth largest master trust provider.
The deal was funded through a £35 million fundraising round, which brought the total raised by the company in the past two years up to £61 million. Speaking to City A.M. following the fundraising, Cushon founder and CEO Ben Pollard said: “Right now, long-term savings are simply too complicated, boring, and disconnected from things people care deeply about. Cushon is here to change that, and today’s announcement is a hugely significant milestone for us.”
Since then, Cushon’s M&A activity has continued, with the company acquiring financial education firm Better with Money in February 2022. The acquisition, which expands Cushon’s financial wellbeing support and education offering, reflects its strategy of not only acquiring master trusts, but also aiming to make pensions more engaging and accessible to savers.
Ben Pollard said: “Financial education has a crucial role to play in getting people engaged with savings and pensions, and we want to ensure we’re offering tailored and relevant guidance to our customers.”
“When our acquisition of the Creative master trust has received regulatory approval, we’ll be managing around £1.5bn of savings on behalf of 400,000 people and so it’s vital these savers have support to make the most of their savings and investments. Our new offering will be key to supporting them on their savings journey and getting even more people engaged with their money.”
Tips for buying-out UK pension schemes
Acquiring a pension scheme as a first time buyer is a complex process, with a diverse array of factors that need to be considered. Funding is a fundamental concern, but beyond that there are numerous multi-faceted issues with legal, insurer and PR connotations.
Firstly, before engaging in a buy-out, you will need to develop a detailed set of data on the scheme you are looking to acquire, both to get a comprehensive overview of the scheme and to present to potential insurers.
Prior to a buy-out, issues with the scheme's benefits will also need to be ironed out, a process that will require a thorough assessment of the pension scheme in order to identify problems, as well as planning and execution to resolve these. Gaining such an overview may involve thoroughly going over the history of the scheme and its benefits.
After a buy-out, the scheme’s previous trustees will be gone, so you, as the new owner, will need to codify trustee discretions for insurers. Similarly, trustees will need to assess the insurer being used - or considered - for the scheme, to determine their suitability, security, capacity and whether assets can be transferred and aligned with their pricing structure.
Once a pension scheme buy-out has been completed, a vital step will be communicating the change properly to members. Whether the scheme in question has a few dozen members or thousands, an effective communications strategy that informs them of any changes and assuages any concerns will be crucial.
Other crucial considerations when executing the deal include comprehensive structuring and documentation - which will be instrumental in ensuring that the deal is a good one and that it acts in the best interests of the scheme members. Finally, ensuring that you have a full discharge under both the rules of the scheme and pensions legislation is highly advisable in order to head off any potential future legal or insurance issues.
Continuing dealmaking – Where could pensions M&A go from here?
With dealmaking so strong, it might seem likely that there will be a brief spell of consolidation followed by a stabilisation in pensions M&A. However, the current signs suggest that dealmaking will in fact continue to gather pace in the UK pensions sector.
Firstly, of course, there is the appetite among consolidators to continue acquiring trusts and portfolios. But, beyond this, there is surely a desire among savers for more well-managed and better-value pensions – something that will also encourage dealmaking.
Concerns about the inefficiency of pension schemes, particularly among smaller trusts, has also led to officials expressing a desire for greater consolidation and voicing their intentions to raise standards across the industry.
In a discussion paper with the Financial Conduct Authority in September 2021, The Pensions Regulator (TPR) suggested a number of measures to combat poor Defined Contribution (DC) fund performance. This included seeking to force schemes to report more data on performance and scheme oversight, along with more reporting on costs and charges.
TPR’s ultimate aim is to create a framework that can assess the value for money that the sector is providing for savers. This is something that could spell bad news for smaller, more poorly-managed funds, and make them more open to an acquisition.
The Pensions Regulator Executive Director of Policy, Analysis and Advice, David Fairs, has said: “The vast majority of DC members continue to be saving into larger, more stable master trusts. However, every saver deserves to be in a well-run scheme which offers good value for money. We know many small DC schemes are poorly run and we are determined to continue to work with industry to drive up standards of governance and trusteeship.”
Fairs added: "We expect this trend of DC consolidation to continue as small schemes are now required to demonstrate that they provide value for members. Where they don’t, we expect them to either wind up or take immediate action to make improvements.”
Appetite is also reflected in the diversity of investment currently pouring into the sector. Taking a look at two of our case studies, for example, shows the breadth of investors looking at pensions and demonstrates that this is an M&A trend set to continue for some time.
Smart Pension’s partners include JP Morgan, Barclays and Chrysalis Investments, while in October 2021 it sold a minority stake to asset manager DWS Group. Cushon’s growth, meanwhile, is being financed by fintech venture capital firm Augmentum Fintech and specialty lender Ashgrove Capital.
The appetite clearly exists, then, and so does the scope for more deals. Of the approximately 27,700 DC schemes currently operating in the UK, more than 26,000 are thought to have fewer than 12 members and could represent ready acquisition targets for buyers looking at buying individual schemes, master trusts or portfolios.
Furthermore, Cushon’s acquisition of Better with Money also reflects how an increasing sense of awareness about the importance of pensions (something that has arguably grown amid the financial uncertainty of the COVID-19 pandemic) is driving M&A activity and could continue to accelerate it even further.
Rather than simply being content with stockpiling pension portfolios and master trusts, pension providers will increasingly be required to be more digitally nimble and offer a wider range of services to their savers. This could lead many to target acquisitions that increase their offering, for example, by targeting pension savings platforms with enhanced digital capabilities, or retirement savings consultancies that enable them to provide more well-developed advisory services to their customers.
The pensions market is going through considerable upheaval. Numerous factors are spurring dealmaking and point to ongoing activity within the sector. With a plethora of financially-strong buyers, a widespread desire for a more consolidated, efficient sector, rapid digital transformation and the looming possibility of tighter regulations, all indications point to a huge number of deals just waiting to be done.
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