The Pensions and Lifetime Savings Association is calling on the government to facilitate consolidation while creating a regulatory framework for the creation of superfunds, but the proposal has received a muted response.
Last month’s government green paper on defined benefit pensions noted that there was a strong case for supporting greater voluntary consolidation, but concluded that it would not be appropriate for the government to design and run superfund vehicles through an arm’s length body.
It’s a good challenge, but there is a risk of just saying ‘big is beautiful’
Steve Webb, Royal London
The PLSA DB Taskforce’s latest report on consolidation examines shared services, asset pooling and single governance as possible options to alleviate the level of risk carried by scheme members. Its main emphasis, however, is on the way in which superfunds designed to absorb and replace existing schemes would be one of the best solutions.
Alleviating risk and costs
Ashok Gupta, who chairs the taskforce, said: “It’s clear to us that superfunds have the potential to reduce the risk to members’ benefits.”
Employers, he added, would have “a lower-cost alternative to buyout”, as well as the advantage of being able to release themselves from legacy DB obligations, “which allows them to focus on their core business”, Gupta said.
He added there would be a benefit for the economy because of the potential for more investment in real assets through a superfund, and because employers would be better able to invest in growing their businesses and creating jobs.
Superfund regulation
Regarding regulation, Gupta said superfunds should be regulated in a similar way to insurance companies.
The merger of assets and liabilities into superfunds, he said, would mean “the regulator gets a sector where the risks are managed better, and they can adopt a more supervisory approach”.
Richard Butcher, managing director at professional trustee company PTL and chair of the PLSA's DC council, said the report “points at the right solution philosophically [and] economically”.
“Consolidation makes sense,” he said. "But I’m not sure it’s the only answer. There are schemes that are grossly inefficient that could improve their efficiency through better governance.”
Butcher added: “The only way that this proposal would work is if the government gets behind it and introduces legislative changes that effectively get the employer off the hook.”
The Department for Work and Pensions pointed to its recent green paper, which also looks at scheme consolidation.
A DWP spokesperson said: “The majority of defined benefit schemes are operating well, but in the wake of recent high profile cases there may be more that needs to be done to support the sector, including considering the role of consolidation in certain situations.”
“We'll be consulting with the pensions industry...to see what more can be done to increase confidence in defined benefit pensions,” the spokesperson added.
What would it look like in detail?
Joe Dabrowski, head of investment and governance at the PLSA, said that over the next few months “we will be looking at doing some more modelling, doing some more analysis, testing the parameters of what a superfund might look like”.
But going beyond asset pooling “into effectively pooling liabilities as well” is challenging according to Steven Dicker, partner in the pensions team at PwC, because it involves “deciding which employer is responsible for what”.
He explained that creating a superfund would require finding a way to separate the employer from the superfund, “so once the scheme is in there its financial claim on the employer is no more”.
“The price of separation is going to be the challenge,” he said. Stressed employers in particular are “not going to be well placed to pay a final break-free” for moving their scheme into the superfund.
The normal way of achieving this would be to complete a buyout with an insurance company, and so for a superfund to be more attractive than that option, “it clearly has to be cheaper”, he explained.
Big is not necessarily beautiful
Steve Webb, director of policy at provider Royal London and former pensions minister, said: “My concern would be how much willingness there is in government to support this kind of thing.”
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He praised the PLSA for bringing the proposals together and said that “it’s a good challenge, but there is a risk of just saying ‘big is beautiful’”.
Webb explained that the superfund idea would take a very long time to implement and would come with significant cost.
