Investors in The Pension SuperFund will not begin to receive returns on their capital until its consolidated schemes have passed a 115 per cent funding target, its executives have told the Work and Pensions Committee.
Details have also emerged on a second commercial consolidator, Clara Pensions, which reportedly will not reward investors until member benefits have been bought out in full.
The UK defined benefit market is among the most fragmented in the world, sharing around £1.6tn in assets between 5,588 schemes, according to the Pension Protection Fund. Superfunds have long been touted as a potential solution, but it took until March for The Pension SuperFund to become the first to launch.
Member security, post transfer to a superfund, has to be materially better than sticking with the existing sponsor
Jon Hatchett, Hymans Robertson
Grilled by MPs on how it plans to balance the interests of members in its scheme and its commercial backers, Luke Webster, chief investment officer at the venture partly financed by Edi Truell, said surplus in the scheme would be held as a buffer, with some diverted towards discretionary increases for members.
Once the scheme passes a funding hurdle, “indicatively 115 per cent on our prudent basis, any surplus in that buffer vehicle can be distributed to investors”, he said.
Webster also told MPs that measures would be put in place to prevent the acquisition of the company by a corporation seeking to strip its pension scheme assets.
“We would view it as highly unlikely that the trustees would ever agree to a change that would imperil their covenant,” he said.
Second model emerges
Already, The Pension SuperFund is not the only consolidator looking for assets. To rather less fanfare than its competitor, Clara Pensions has also emerged in the market, although its chief operating officer and co-founder Kim Toker told Pensions Expert that it is still finalising the details of its proposition.
Its safeguards are likely to differ from those described by Webster and Rubenstein. At the select committee hearing, Hymans Robertson partner Jon Hatchett said that Clara Pensions is likely to operate a system where investors are not paid until all members of a scheme see their benefits transferred to an insurer in full.
Explaining the economics behind choosing such a vehicle over an insurer, Hatchett pointed to the significant increase in price for insuring a deferred member relative to a pensioner.
By warehousing the scheme and securing assets against liabilities over a number of years, “even if you don’t generate any other returns from any other source, that can make a scheme materially cheaper to buy out”, he said.
Do not confuse consolidation with insurance
Despite the gathering momentum behind superfunds, there are many sceptics, not least insurers familiar with the cost of securing pension promises in a low-risk way.
Laura Mason, chief executive of Legal & General’s retirement institutional business, told the committee she was concerned that people might equate the cheaper but riskier solution offered by a superfund with the “gold standard” protection offered by insurer buyout.
“[Having] different regulated entities, one of which is more strongly regulated, both from a financial perspective and a conduct perspective, that is a concern,” she said.
Neither is the select committee itself convinced of the importance of superfunds.
Frank Field, who chairs the committee, said that as superfunds are primarily aimed at relatively well-funded schemes, they would do little to help those schemes most in need.
“The superfunds are moving the deckchairs around on the Titanic. You might get bigger chairs out of it for various participants, but we’re not dealing with what I see as the biggest challenge facing this sector.”
Trustees need to weigh up security
If consolidators do become a feature of the UK pensions system, trustees of ceding schemes will have an enormous responsibility on their hands.
For trustees to sign off on a consolidation, Hatchett told the select committee that “member security, post transfer to a superfund, has to be materially better than sticking with the existing sponsor”.
With that in mind, the schemes for which superfunds are an attractive option are those that are “quite a long way from buyout but reasonably well funded, but have weak sponsors”.
