Pension superfunds — or consolidators— are aiming to collect together several corporate pension schemes and run them more cheaply and efficiently than the companies that set them up.
How will they work?
The companies that set the schemes up (sometimes called the sponsors) will pass all the assets and liabilities in the scheme on to the superfund. The sponsors may have to make a payment into the scheme to enable the deal to happen, and outside investors will also put money in. The superfund will then run the schemes either for decades until all the pensions have been paid, or until the scheme is financially strong enough to be passed on to an insurance company.
Who regulates them?
The Pensions Regulator, under new rules proposed by the government in December 2018.
Who makes money out of them?
The companies organising the superfunds will make money. So will the outside investors that put money into them.
What do they mean for pension scheme members?
Scheme members should not see any change to the benefits that they have been promised, at least in the short term. However, the backing behind the schemes will change. Instead of being backed by a regular company which can use some of its annual profits to top up the scheme, the superfunds will be backed by a fixed pool of capital. That may be better for the members in some cases, especially if the original company that made the pension promises is financially weak. If a superfund gets into trouble then, like regular pension schemes, the members will go into the Pension Protection Fund and some of their benefits are likely to be cut.
Why are they controversial?
Because they provide new competition for insurance companies, which also take on company pension schemes via products known as buy-ins and buy-outs. Insurers say their own products are the “gold standard” as the Solvency II insurance capital rules mean that they have to hold a lot of capital to back the pension promises. Superfunds will have a different set of rules and, crucially, will probably have to hold less capital than the insurers (although the exact rules have yet to be finalised). That means that companies will be able to pass schemes on to the superfunds more cheaply than a buy-in or buy-out would cost.
When will they get going?
The first two superfunds — Clara-Pensions and The Pension SuperFund — say they are in talks with companies over their first deals, although the consultation on exactly how they will work has only just been launched.