The Pension SuperFund: Benevolent disruptor or danger to members?

The Disruptive Capital founder has announced his plans to back a consolidation vehicle, The Pension SuperFund, to be chaired by former Pension Protection Fund chief Alan Rubenstein and reportedly targeting £500bn in assets.

The venture, which has also poached former PwC head of pensions advisory Marc Hommel and Greater London Authority chief investment officer Luke Webster, is the first ‘buyout-lite’ consolidation vehicle to announce its plans, but Pensions Expert understands more are expected this year.

Consolidation has been touted as a driver of improved efficiency in the UK DB sector, and received fresh impetus from the government’s DB white paper, also released this week.

Any trustee board is going to have to be top to bottom convinced that members are better [off] with the consolidator than they are where they are

Neil McPherson, Capital Cranfield Trustees

Truell’s PSF will sever the link between employers and their schemes in exchange for an injection of funding into the scheme and the opportunity to charge a performance fee on the scheme’s assets.

Unlike the superfund model proposed by the Pensions and Lifetime Savings Association last year, it will not involve the harmonisation of scheme benefits and so, it is claimed, will not require any legislative change for its creation.

Speaking to Pensions Expert, Rubenstein said he was encouraged by the DB white paper’s consideration of how to facilitate greater consolidation, and was comfortable the new company could satisfy any regulatory concerns: “Whatever the regulators come up with, we’ll be able to comply with.”

Subject to transaction approvals, the venture has attracted £500m in initial capital from institutional investors including Disruptive Capital and Warburg Pincus, and said it is in conversation with several employers over potential transfers in.

An alternative to insurance

The vehicle will seek to operate under the watch of the Pensions Regulator rather than the Financial Conduct Authority or Prudential Regulation Authority, a move that will afford it more investment flexibility.

As such, it will not be required to hold regulatory capital, something that is likely to frustrate insurers providing bulk annuities under the Solvency II regime.

“Part of our thinking is that insurance is not necessarily the right approach for pension funds,” said Rubenstein. Some schemes have little chance of making it to buyout, and a strong covenant now might not be a strong covenant in 10 years.

“We always used to say that you’d rather have a weak covenant with a well-funded scheme than a good covenant with a poorly funded scheme,” Rubenstein recalled of his PPF days.

Operating outside the insurance regime does not necessarily mean that the PSF will ease its funding requirements by taking risks in its allocation. “We’ll be choosing a strong and sound valuation basis,” he reassured.

The dangers of commercialism

Still, the PSF has some work to do to make the case for letting commercial entities profit from pensions, with the backing of the PPF if it all goes wrong.

Jon Hatchett, a partner at consultancy Hymans Robertson, said a vigilant stance would be needed to ensure that variations in investment strategy and pricing do not lead to a race to the bottom benefiting financial directors at the expense of member security.

“That is a danger, and that is part of the role that I think regulators and trustees have to play, to stop a race to the bottom,” he said.

Although some sponsors are paternalistic, “for an archetypal FD who’s only concerned about the bottom line, then the superfund is a no-brainer”, he added.

The PSF and its backers may feel that its fee structure, chosen to align member and commercial interests, acts as a safeguard against mismanagement and unnecessary risk to the PPF.

The fees payable to the superfund will be “related to the improvement in the scheme’s funding level and... is only payable when the scheme is in surplus”, according to a spokesperson.

Profiting with PPF backing?

As for conditions for PPF protection, the government’s white paper hints at a possible solution.

“Members and trustees of transferring schemes may well be reassured by PPF eligibility,” it noted.

“However, depending on how funding and wind up requirements are defined, PPF protection may not be necessary – for example, if provisions are constructed in such a way to ensure that, in the event of failure, the consolidator is always able to buy out member benefits above PPF levels of compensation.”

Moreover, the regulator has hinted that any bulk transfers into a superfund may need to be checked via its clearance process.

“Our clearance process exists to offer comfort that a major financial transaction will not result in the use of our anti-avoidance powers and we would need to be satisfied that any such scheme was appropriately funded, governed and administered on an ongoing basis,” a spokesperson said.

Trustees must make difficult decisions

Even with robust regulation in place, the combination of superfunds hungry for assets and sponsors desperate to shed liabilities will need trustees to make brave decisions.

Equipped with the power to veto a transfer, they must not allow one unless the case for doing so is abundantly clear, said Neil McPherson, managing director of Capital Cranfield Trustees.

“Any trustee board is going to have to be top to bottom convinced that members are better [off] with the consolidator than they are where they are,” he said.

He said this was likely to only be the case for schemes already close to PPF entry, and instead urged a refocusing on asset pooling, calling it “a goal worth pursuing, which would achieve the vast majority of consolidation benefits”.