The chief executive officer of The Pension SuperFund has said the fledgling defined benefit scheme consolidator's asset allocation is likely to resemble that of the Pension Protection Fund.
Speaking at a Transparency Task Force event last week, former PPF head Alan Rubenstein said he expects his new project to “run with a very low-risk asset allocation strategy”. The PPF's portfolio favours bonds, alternatives and cash over equities.
Rubenstein also sought to quell fears that the consolidator's private backers will profit at the expense of DB members.
We want to make sure that our investors and our members win or lose together
Alan Rubenstein, Pension SuperFund
On March 19, the Department for Work and Pensions’ DB white paper announced a consultation “on a framework for consolidation, offering industry the opportunity to innovate but ensuring there are robust safeguards in place so members’ benefits are well protected”.
The launch of the UK’s first superfund was announced a day later, with an initial £500m of capital investment.
Portfolio will shun unnecessary risk
Rubenstein told the TTF audience that the superfund's investment strategy would target stable cash flows.
“We’re not looking for large outperformance, and nor are our investors, because they actually do best if we improve the funding by a little, consistently, rather than having a very volatile outcome,” he said.
The PPF’s assets are heavily invested in low-risk assets. It has 58 per cent in cash and bonds, 22.5 per cent in alternatives, 12.5 per cent in hybrid assets and just 7 per cent in equities.
“If you look at where I’ve been and the asset mix there, that delivers a well-matched, low risk, good return, so it’s not unreasonable to assume that we’d have an asset mix that’s very like the PPF,” Rubenstein said.
Investors incentivised by funding thresholds
Rubenstein also reassured attendees that member security will not be sacrificed to generate profits for The Pension SuperFund's backers.
Investors will not receive dividends until “certain thresholds in funding are met,” he said.
“In essence, what we do is make sure the liabilities are funded to 115 per cent of the value of the prudent actuarial basis”, he said, which will be backed by investor-provided contingent capital.
Two-thirds of any assets above that target will be split between the fund’s capital investors, Warburg Pincus and Disruptive Capital. The remaining third will be shared among members. "We want to make sure that our investors and our members win or lose together," he added.
The vehicle will be less suited to smaller schemes, Rubenstein said, and will be more appropriate for those with liability values ranging between £200m and £10bn.
These schemes will already be closed to future accrual and funded between 80 per cent to 120 per cent on a technical provisions basis.
Ensure the regulator’s support
In response to the DB white paper, the Pensions Regulator stated in March: “TPR will be working with DWP to develop all the proposals in the white paper, including in relation to consolidation.”
Rubenstein anticipated close scrutiny of his consolidator vehicle, and said: “We would expect the regulator to pay close attention to our asset mix and to ask us why we’ve chosen a particular asset allocation.”
Charles Cowling, director at JLT Employee Benefits, argued that basing The Pension SuperFund’s asset mix on the PPF’s proven strategy could help to positively engage the regulator with the fund.
“It’s certainly not done the PPF any harm, and from a position of presenting it to the regulator, I can see attractions in presenting something that is very similar to the PPF,” he said.
Cowling recognised, however, that investors will expect a return on their capital, and that this could influence the fund’s investment strategy.
“Their business model might want a higher or lower return with different levels of risk,” he said.
SuperFund could learn from the Dutch
Defined benefit consolidation has taken place at a rapid rate overseas. The Netherlands had just 268 DB plans in 2017, compared with 1,060 in 1997, according to De Nederlandsche Bank.
In comparison, the UK still had 6,200 private DB schemes in 2016, according to the Pensions Regulator.
Russell Chapman, head of the London investment practice at Hymans Robertson, recognised that the UK has “been a little bit behind” in moving towards DB consolidation.
PPF chief hints at closing superfunds’ regulatory advantage
Consolidation vehicles hoping to hoover up assets from deficit-weary employers could see their prices forced upwards by tough levy requirements and insurance-style protections, the chief executive of the Pension Protection Fund has said.
Consolidation “is a good idea for a number of schemes, in terms of getting better economies of scale and management of assets,” he said.
Ania Zalewska, professor of finance at the University of Bath’s School of Management, said The Pension SuperFund “should not try to reinvent the wheel”.
Instead, the consolidator’s investment strategists should “try to learn from big funds and systems that have a long record of relatively good performance,” she said, adding that there is “a lot to be said about the Dutch counterparts and their liability-driven investments”.
