In an intervention that laid bare a deep divide both in the industry and between regulators, Bank of England governor Andrew Bailey has reignited a long-running feud between traditional insurers and advocates of new superfund models, while casting doubt on the Pensions Regulator’s ability to oversee consolidators.
Superfunds, the broad term applied to vehicles that replace the reliance on the sponsoring employers with a capital buffer supplied by external investors, will have to pass a TPR assessment on financial sustainability and show they are fit, proper, and have adequate systems and processes in place, according to a new interim regime unveiled on June 18.
In a letter to work and pensions secretary Thérèse Coffey, first revealed by Sky News, Mr Bailey is reported to have warned that the regulator’s interim guidance for consolidators could leave them the beneficiaries of “regulatory arbitrage”.
Mr Bailey’s intervention was branded “scathing” by an industry source, according to Sky News, and he is said to have called TPR’s interim regulatory standard inadequate, cautioning that the growth of a large superfund sector under that inadequate standard is a threat to financial stability.
However, another industry source told Pensions Expert that the letter was more routine and less inflammatory. Nevertheless, the points raised in it underscore a number of unanswered questions in the superfunds debate.
We’d like to see more prescriptive regulation. It doesn’t need to be the same as Solvency II, but it should carry more of its features in terms of the level of rigour and prescription, and more detailed stress tests, continuous supervision and more enforcement powers
Rob Yuille, Association of British Insurers
Welcoming the governor’s intervention, Emma Watkins, director of annuities at Scottish Widows, said: “It was reassuring to see [Mr] Bailey speak out about the inherent risks posed by the interim guidance facilitating consolidation into commercial entities.
“The inconsistencies of a two-tiered regulatory system will inevitably result in regulatory arbitrage, providing tempting loopholes for unscrupulous employers,” she said, adding that in the absence of legislation, “trustees will need to fill this gap and approach consolidation into commercial vehicles very cautiously”.
Vague guidance ‘poses risk for savers’
The apparent conflict between TPR and the BoE’s Prudential Regulation Authority, which previously expressed its own reservations about regulatory supervision of superfunds, has been branded by critics including the Association of British Insurers as “extremely awkward”.
ABI assistant director Rob Yuille told Pensions Expert: “We are not against the idea of consolidation, but throughout we’ve called for robust regulation of consolidators.
“That looked to be the way the policy was being taken, and we’re disappointed at the outcome of TPR’s interim regime. We thought it was far too light on detail compared with the regimes for insurers, and not as clear as the proposals TPR made themselves in the autumn.”
Mr Yuille said the lack of clarity creates problems, most importantly by posing a risk for savers as “it’s not clear to trustees how secure superfunds are, either compared with other superfund [models] or with buyouts with insurers”.
While accepting that the purpose of consolidators is to provide a cheaper alternative to insurance, and so they should not be subject to exactly the same regulations – as “that would defeat the object” – he nonetheless argued that the interim guidance published by TPR fell well short of the high standards insurers have to abide by under Solvency II.
“Insurers have to hold enough capital to withstand a one in 200-year event, and if one of those happens they’ve got to recapitalise to be able to operate the following year,” he explained.
“Something similar would have applied to superfunds. But [TPR] backed away from that in favour of a 99 per cent chance of paying out benefits within five years. The assumptions that was based on aren’t clear, and there’s no requirement to recapitalise.”
Mr Yuille said the waters are muddied further by the profound disagreement that seems to exist between TPR and the PRA, with the latter warning in its response to a Department for Work and Pensions consultation on superfunds in 2018 that “there may be unintended consequences if the two types of business are regulated differently”.
The Financial Times reported in September that the PRA’s position, backed by the insurance sector, was that the capital regime for superfunds should mirror the strict standards by which insurance companies have to abide, yet TPR’s interim guidance conveys a different view.
The point was hammered home in a speech by BoE executive director of insurance supervision David Rule last year, in which he warned against “opaque models, optimistic assumptions and impenetrable mumbo jumbo” that might result from the kind of vague regulatory guidance Mr Yuille said TPR’s interim regime represents.
“We’d like to see more prescriptive regulation,” Mr Rule said.
“It doesn’t need to be the same as Solvency II, but it should carry more of its features in terms of the level of rigour and prescription, and more detailed stress tests, continuous supervision and more enforcement powers.”
In response to the criticism, a TPR spokesperson said: “We are fully alive to the risks presented by unregulated DB consolidator superfunds and other new models which are already being set up. Protections for savers are needed now. This is why we have set a high bar for how they must show they are well-governed, run by fit and proper people and are backed by adequate capital.
“Our robust interim regulatory regime will help ensure savers can have confidence in superfunds should their pension be transferred into one in the future. Our modelling illustrates that under our framework, there is a 99 per cent likelihood that the superfund would be able to pay the benefits they are promising to members' in full.
“We welcome the Government's announcement that it is developing a permanent regime before introducing specific superfunds legislation.”
Superfunds happy to explain model
Striking a conciliatory tone, Adam Saron, chief executive at Clara-Pensions, said: “Monitoring financial stability is the governor’s job, so we'd expect him to take an interest in anyone who holds large amounts of assets – insurers, pension schemes and hopefully, one day, consolidators.
“We're always happy to explain our model to people and why a bridge to the insurance market like Clara’s will create safer, more stable pensions for members.”
A Clara spokesperson explained that the consolidator “provides a safer pension promise today by combining its own capital and robust governance with additional contributions from sponsors, who can now transfer the burden of their pension liabilities to Clara. This frees up companies to focus on their future growth”.
They said that Clara will provide a “low-risk journey to an insured buyout”, and added that “only once all members have their full benefits secured will Clara provide a long-term return on capital for investors”.
Although The Pension SuperFund would not go further in response to the governor’s letter than the comments provided to Sky News, in which TPSF founder Edi Truell pointed to the unaffordability of insurance buyouts post-Covid-19, Pensions Expert spoke to its chief executive, Luke Webster, about the fight with traditional insurers at the time the interim guidance was published.
Mr Webster said that the debate between insurers and superfund models had emerged “from the wrong perspective”.
“It’s conflating high standards and ‘the same as insurance’,” he said.
Superfunds cleared to begin work under TPR interim regime
The Pensions Regulator is to sanction the transfer of struggling corporate defined benefit schemes into commercial consolidators aiming to secure pensions at a lower cost than insurers, under a two-part interim regime.
“Anything involving people’s retirement savings should be regulated to the highest standard, but pension solutions operating within the occupational pensions regime are very different from insurance.”
The occupational pensions regime, under which superfunds sit, needs to be more flexible than that which governs insurers, in order to allow for different long-term strategies – for example, infrastructure investments, which would be difficult to pursue under Solvency II restrictions, Mr Webster said.
“There’s also a governance difference,” he added, as the conflict of interest that exists between company directors and policyholders is different to that which exists between trustees and sponsors.
In short, he said, despite some of the similarities in terms of paying benefits and managing assets and liabilities, “the insurance-pensions comparison just isn’t a constructive place to start”.
