A government consultation published last week will allow the UK’s commercial defined benefit consolidators to press ahead with their first deals, it has been claimed, although some experts say questions remain over how the businesses can be prudently regulated.
Superfunds have been mooted as a solution to the UK’s fragmented and sub-scale DB universe where employers cannot afford buyout. However, no deals have been announced so far.
The consultation was accompanied by an assurance from the Pensions Regulator that cooperation with the watchdog will mitigate the risk of legal action later.
“By coming to us now, superfunds can show us how they plan to meet the standards we and government expect, and prevent possible regulatory action further down the line,” said David Fairs, the regulator’s executive director of regulatory policy, analysis and advice.
I think trustees will probably hold tight for now and see what happens next
Paul McGlone, Society of Pension Professionals
Adam Saron, CEO of consolidator Clara Pensions, said this offer of collaboration “is really the starting gun” on commercial consolidation, and that his company would begin discussions immediately with the regulator over its first transfer.
Meanwhile, Luke Webster, CEO of the Pension SuperFund, said he expected to file the scheme’s first clearance application before Christmas. “We’d anticipated a lot of the stuff, but the guidance helpfully gives us a template to put it all together.”
Members security paramount
The government is still seeking views on the eventual shape of superfund regulation, but the document sheds light on the principles underlying its approach, focusing largely on member security.
Consolidators will have to offer ceding employers a 99 per cent chance that their members will be paid their benefits in full, in addition to a number of requirements for authorisation that borrow from the regulator’s regime for master trusts.
The consultation also suggests that if a superfund reaches buyout levels of funding, “the rationale for remaining in a regime without a sponsoring employer, but with lower protection than an insurer could provide, falls away”.
It is unclear whether the Department for Work and Pensions will insist that schemes are bought out when possible. Webster said returns to members and investors would avoid the scheme hitting the trigger.
The document also proposes gateway conditions for schemes to be eligible for transfer into a consolidator, such as not being in a position to buy out benefits within five years. Transfer must also improve the chances of paying benefits in full.
Legislation and authorisation will take time to put in place. In the interim, the regulator has also published guidance for trustees stressing that a transfer must be in the interests of members, and will require that employers seek clearance before proceeding to break the sponsor link.
The two commercial consolidators currently on the market still have questions of their own to answer. Neither have a third-party administrator.
Most trustees will be wary
But experts also said there are major regulatory questions still to be answered in a subsequent green or white paper.
“Unless they have got a burning platform that is forcing them into something I think trustees will probably hold tight for now and see what happens next,” said Paul McGlone, president of the Society of Pension Professionals.
McGlone said stipulating a stochastically modelled 99 per cent chance of success, while still providing a significant discount from Solvency II buyout pricing, could narrow the range of schemes that can benefit from consolidation.
He said schemes that are fully funded on a typical self-sufficiency basis are “nowhere near” this likelihood of paying benefits in full, and added: “What happens to a scheme that’s only got 70 per cent at the moment but could afford 90 per cent?”
The consultation has met with opposition from the Trades Union Congress, which said the government’s outline does little to help those schemes most in need, instead focusing on those just out of reach of buyout.
“We’re still concerned that it gives investment banks and hedge funds a path to make big profits out of members’ savings and doesn’t do anything to help those in the weakest schemes, or indeed to put DB schemes on a firmer footing,” said Tim Sharp, pensions and investments policy officer.
Trustee role is crucial
Despite these concerns, consolidation looks likely to go ahead, and indeed the consultation notes that superfunds do not necessarily need new legislation to set up shop.
That leaves trustees with a vital role in protecting members where employers see a cheaper alternative to insurance.
“By asking trustee boards to ‘comply or explain’ the DWP is sending a clear message that schemes must fully understand the potential risks and rewards of moving to a consolidator, just as they are expected to look at the covenant position before and after corporate activity to assess if there is any detriment to their scheme,” said Simon Kew, director in Deloitte’s financial advisory practice.
Francis Fernandes, senior adviser at Lincoln Pensions, agreed: “This green light given to superfunds has the potential to lead to a stampede for the exit by many DB sponsors.”
“For trustees, the essence of the decision is whether or not the exchange of covenant is in the members’ best interests. For sponsors, they also need to be sure not just legally but also reputationally that the risk never ends back with them in years to come.”
