The Pensions and Lifetime Savings Association (PLSA) has called on the government to create a £1.5trn superfund made up of the UK’s defined benefit (DB) schemes.
The PLSA’s DB Taskforce has claimed a full-blown merger of schemes could better protect members’ benefits against the “unacceptable” and “mostly unrecognised” risk of sponsoring employers going bust.
It said consolidation could help schemes stuck with a choice between relying too heavily on their sponsoring employers and hoping, often in vain, to reach expensive buyout funding levels.
The Taskforce’s first paper, published in October last year, identified that UK pension schemes accounting for around half of all future pension benefits had only a 50/50 chance of making it to full funding before their sponsor becomes insolvent.
Its latest paper, published today, proposes tackling this by offering four consolidation models. The most radical is a full-blown £1.5trn merger of the UK’s DB schemes which would absolve employers and trustees of their obligations for future benefit payments.
And it has called on the government to make it easier for consolidation by introducing a new requirement for DB trustees to demonstrate to The Pensions Regulator (TPR) that the scheme is being run effectively and, if not, the steps they are taking to fix it.
Under the proposals, the role of trustees would not change and they would still be expected to act in the best interests of members. TPR would oversee the transition process to a superfund and it would be eligible for entry into the Pension Protection Fund if it was to fail.
According to the Taskforce’s own modelling, a full merger could improve security for savers in schemes whose sponsor is deemed by the regulator to have a weak covenant – reducing the probability of seeing their scheme fail from 65% to nearer 10% or even less.
The other three proposals put forward by the Taskforce are: sharing services such as administration; creating an asset-only pooling structure similar to that currently being implemented among LGPS schemes in England and Wales; and adopting a single governance structure across schemes.
The Taskforce estimated sharing services could save £600m a year, while asset pooling and a single governance structure could save £250m and £1.2bn a year respectively.
It added out of the four options only a full merger had the potential to materially reduce the risk faced by members of DB schemes.
DB Taskforce chairman Ashok Gupta (pictured) 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 buyout. 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.”
Consultant Hymans Robertson said the Taskforce’s proposals clashed with the Department for Work and Pensions’ (DWP) recent green paper on DB sustainability which concluded that DB schemes remained affordable for the majority of employers.
Hymans Robertson head of trustee consulting Calum Cooper said: “The PPF’s modelling suggests that in the worst 10% of outcomes around 1,000 sponsors could be insolvent by 2030.
“For the DWP to say ‘affordability is fine’ seems to be answering a very narrow question. By the DWP’s own statistics DB scheme recovery plans are barely any shorter than they were 10 years ago, despite hundreds of billions of pounds being spent by companies. And yet when sponsors fail members lose £50k on average.”
Commenting on the PLSA’s aspiration to consolidate DB funds, Cooper said there was “an elegance to the theory but it feels vulnerable to be being hijacked by reality”.
“Moving into a merged superfund would mean schemes would cede control and influence over outcomes,” Cooper said. “The cost and risk exposure for larger schemes (either in absolute terms or relative to their sponsor) is too big for their trustees or sponsors to surrender control and influence over funding and investment outcomes willingly.”
He added: “Creating a £1.5trn superfund would require a huge amount of up front spend and resource, covering bulk transfers, project management, member communications, administration and transition costs, to name a few. These upfront costs would need to be balanced against the potential cost savings.”
