PLSA proposals welcomed but superfunds still ‘a step too far’

Sixty-five per cent of surveyed employers said they would support the principle of consolidation, while 39 per cent said they are already keen to consider superfund entry, according to the report.

Experts broadly welcomed the PLSA’s recommendations on standardising benefits and formalising the chair’s statement, but concerns remain over the viability of superfunds, and the level of attention the proposal has drawn from the paper’s other findings.

I do wonder whether at this stage the superfund might be a step too far for some people

John Wilson, JLT Employee Benefits

The need for a new chair's statement

Since 2015, defined contribution scheme trustees have had to submit an annual governance statement for approval by the chair of trustees.

The PLSA has proposed extending this requirement to DB schemes, arguing that a requirement on schemes to demonstrate to the Pensions Regulator and their members that they are operating efficiently through a DB chair’s statement could be an effective mechanism.

A model chair’s statement would include detail on investment, covenant, transparency, governance and consolidation.

Darren Redmayne, managing director at covenant advisory Lincoln Pensions, approved of the idea. He was particularly encouraged by the statement’s proposed reference to the strength of the covenant.

“Ultimately, members are reliant on the covenant to stand behind their benefits, and ought to know as part of the update on the fund [and] get a sense of how good the covenant is,” he said.

It would be desirable “particularly in a pension freedoms landscape, where members need to make decisions about what to do about all their benefits, and know whether they should in certain cases transfer out of funds”, he added.

Update the Pensions Act

Benefit structures in the UK are as numerous as they are different. With 6,000 DB schemes currently operating tens of thousands of benefit structures across the UK, harmonisation has been identified as a solution to the challenges and costs of this complexity.

Efforts to standardise benefit structures are currently obstructed by section 67 of the Pensions Act 1995, which forbids the reduction of a saver’s accrued benefits without their consent. This applies even where trustees and their advisers have certified that a benefit restructure would be actuarially equivalent.

The PLSA has suggested an amendment to the pensions act that would allow trustees to alter their scheme through benefit harmonisation, providing actuarial equivalence is retained.

It has also proposed a “white-list regime”, which would codify a list of criteria for trustees seeking to simplify benefits.

Hugh Nolan, director at Spence & Partners, described the PLSA’s recommendations on benefit harmonisation as “sheer genius”.

He said the pensions act “is a massive barrier to what would be a great public good, in being able to simplify these schemes and stop pouring money down the drain in terms of wasted administration costs”.

The PLSA anticipated that benefit simplification will improve governance and member communication, while reducing hedging and buyout costs. It also predicted that standardisation would increase opportunities for scheme consolidation.

Are superfunds a step too far?

The report provided further details on its most radical idea, entailing the creation of superfunds. The solution, first put forward in a DB taskforce report published in March, would involve schemes participating in full mergers.

John Wilson, head of technical at JLT Employee Benefits, welcomed the report’s other suggestions. But he did not share the body’s enthusiasm for superfunds, and did not expect their introduction in the short term.

“I suspect that when the Department for Work and Pensions’ white paper comes out… we will see some proposals relating to consolidation. But I’m not sure yet whether government is ready to go as far as PLSA are proposing,” he said.

The PLSA taskforce estimated that the total annual cost savings for schemes that elected to pool assets, governance and services would be approximately £1.2bn per year.

Wilson said: “I do wonder whether at this stage the superfund… might be a step too far for some people.”

He said that experts have speculated “whether or not this is just a cheap form of pensions buyout” and a convenient way for employers to relinquish their DB liabilities.

The idea has not been universally rejected, however.

Former pensions minister Ros Altmann said the costs of running a small scheme relative to a large scheme, which would be up to “eight to 10 times higher” for a small scheme, justify further dialogue on consolidation.

“I think five to 10 years is not an unreasonable time to be expecting this to roll out,” she said.