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Superfunds need robust controls, says pensions chief


Britain’s pensions safety net could be at risk from “superfunds” that offer employers a new way to offload pension obligations to former employees unless strong regulations are put in place.

Oliver Morley, chief executive of the Pension Protection Fund, the industry backed £30bn lifeboat scheme, warned that if the new style superfunds are not strongly regulated they could pose a “significant” risk to the scheme.

The PPF, which is funded by an industry levy, acts as a safety net for millions of defined benefit (DB) pension scheme members and pays compensation to them if the employer backing their pensions becomes insolvent. Under current rules, the superfunds, which have no employer backing, are covered by the PPF if they fail.

“Large superfunds without a strong regulatory environment, without a strong covenant, represent a significant risk for us and we wouldn’t be in a position where we could raise a levy that would fully compensate that,” said Mr Morley in an interview with the Financial Times.

“The most important thing is there is regulation and that the regulator can obviously use it successfully to ensure that consolidators do behave in the way that will help the market rather than hinder it,” he added.

The government is keen to encourage “superfunds”, which take over the assets and liabilities of corporate DB schemes with the aim of running them more efficiently as a single large pooled fund. It also believes they could help ease the burden of employers who support traditional DB plans, where a pension is promised for life.

Currently, employers can pay insurers to take over their pension obligations to former staff via deals known as “buy out.” But because of the strict solvency requirements placed on insurers, this option is more expensive for employers wanting a clean break from their DB scheme.

Two pension superfunds have been established over the past year. One, the Pension Superfund, does not pass on members to an insurer; the other, Clara-Pensions, aims to pass schemes on to an insurer via a buyout.

“The most important thing is there is regulation and that the regulator can obviously use it successfully to ensure that consolidators do behave in the way that will help the market rather than hinder it,” said Mr Morley.

His comments come as the government considers its response to a consultation on how the new pension consolidators should be regulated. “Encouraging a well regulated superfund sector may offer a more effective way of managing liabilities for some schemes,” the government said.

“It would provide an incentive for employers to inject significant sums into their schemes to bring them up to being sufficiently well funded on a prudent basis, so that they can enter a superfund. This potentially significant upfront investment would allow the employer to discharge their legacy liabilities, and concentrate on their core business, while being reassured that the members of their pension scheme are likely to be better protected in the long term.”

A significant proportion of the UK’s 6,000 DB schemes are facing a funding shortfall, despite £120bn being paid in special contributions by employers.

Insurers and trade unions have raised concerns that superfunds will not be subjected to the same strict solvency requirements as insurers, allowing them to offer a cheaper option to employers than a buyout, which is considered the “gold standard” for pensions.

Mr Morley said superfunds that aimed to eventually pass pension schemes to an insurer through a buyout were “safer” models for members than those that bypassed insurers. “It means that there’s a very, very clear track to a point where we can be absolutely confident that members, the pensioners, are going to be safe,” said Mr Morley.

The Pension Superfund disagreed. “Imposing a bridge to buyout constraint on consolidators will restrict either affordability or access to external capital, with a common result of denying the benefits of consolidation to many schemes,” said Luke Webster, chief executive.

“It would also would close off trustees’ discretion to consider a consolidator that could offer a higher base level of benefits together with the prospect of shared upside. In short, this thinking is likely to be a great comfort to insurer’s shareholders but rather less so for less well off pension schemes and their sponsors.”

Until a new regulatory regime is in place, trustees are expected to voluntarily seek clearance from the Pensions Regulator before any scheme is transferred to a superfund.

“The government plans to introduce a strong regulatory regime around transfers to superfunds and has consulted on how best to implement that framework,” said a spokesperson for the Department of Work and Pensions.

“We expect superfunds to engage with both The Pensions Regulator — which has already set out detailed guidance for trustees — and the Pension Protection Fund, pending introduction of this regime.”



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