Call for new ‘superfunds’ to solve DB pension failures

The Pensions and Lifetime Savings Association (PLSA), the UK pensions trade body, is calling for legislation to create new  ‘superfunds’ to consolidate defined benefit (DB) pension schemes, to reduce the risk of scheme members missing out on benefits if their employer goes bust

The PLSA has published a report which identified that members of schemes with the weakest employers, schemes which hold 42% of liabilities of schemes in deficit, have just a 50:50 chance of seeing those benefits paid in full.

It says these schemes are stuck with a choice between trying to manage this risk through heavy reliance on struggling sponsors, or hoping to reach buy-out levels of funding which few can afford, and argues there is ‘a clear and pressing need for an alternative option’.

The PLSA’s DB taskforce has now published additional research which examines four models that offer trustees an additional option that would alleviate the level of risk carried by scheme members.

They are shared services, which combine administrative functions across schemes; asset pooling; and single governance. The PLSA says these three options deliver savings but do not materially reduce the risk faced by members of DB schemes.

Instead, its DB taskforce favours the fourth option, which is the creation of a ‘superfund’ designed to absorb and replace existing schemes. It argues that for schemes with sponsors categorised as ‘weak’ by the regulator, the probability of them failing would fall from 65% to 10% or less if they were able to consolidate.

The taskforce says superfunds would absorb and replace existing schemes, taking on both assets and liabilities. Employers and trustees would be discharged from their obligations for future benefit payments, and the superfund would instead carry out the role of both scheme and sponsor.

Ashok Gupta, chair of the DB taskforce, said: ‘We think the biggest gains lie in the merger of schemes, into what we have called superfunds. We believe superfunds have the potential to offer great benefits to members, employers, the regulator, the industry and the economy.

‘Members get a better chance of more pension benefits being paid. Employers get a lower cost alternative to a buy-out. The regulator gets a sector with better managed risks. The economy benefits from improved investment by superfunds and employers are freed from onerous DB burdens.’

The PLSA says it now intends to put the case for superfunds as part of its response to the government’s green paper on pensions. It says the government should bring forward legislation that removes barriers to consolidation and work to build a regulatory framework for the creation, authorisation and supervision of superfunds.

In a statement, the PLSA said: ‘We’re calling on the government to make it easier for consolidation to happen and to introduce a new requirement for trustees of DB schemes to demonstrate to members and  the Pensions Regulator that the scheme is being run effectively and, if not, what steps they are taking to fix it.’

PLSA’s report, The Case for Consolidation, is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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