The Government has proposed introducing a permanent ‘superfund’ regulatory regime to provide employers and trustees with a new way of managing DB liabilities.
The Department of Work and Pension is calling for evidence from the industry on how best to implement these measures.
This was part of a package of consultation documents announced yesterday, aimed reforming the pension landscape. This includes plans to speed up consolidation in the DC market while also ensuring larger schemes boost investments into the UK economy via unlisted assets, with a focus on high growth bioscience and fintech start-up businesses.
While most of the reforms look at the DC market there were a number of proposals aimed at the DB sector. Many of these have support from both the DWP and Treasury.
In his Mansion House speech chancellor Jeremy Hunt said he was interested to hear from the industry on “the possible role of the Pension Protection Fund and the part Defined Benefit schemes could play in productive investment” while also securing members’ interests and protecting the sound functioning and effectiveness of the gilt market.
The Pensions and Lifetime Savings Association (PLSA) welcomed this latest call for evidence, saying it gave employers another endgame option that in many cases would be more affordable.
It pointed out that DB Superfunds were a key recommendation of the PLSA-led DB Taskforce in 2017, creating an incentive, and achievable goal, for them to make a one-off payment to reach self-sufficiency funding levels without having to pay for the more expensive – and in many cases unachievable and capacity constrained – insured buy-out option.
It added that once superfunds have achieved sufficient scale, they have more opportunity to invest in more productive investments such as unlisted equity and fixed income.
The PLSA also welcomed the DWP’s proposals to review the DB regulatory landscape, in light of the improved funding position of many schemes. It said it is important to ensure the right balance is struck between protecting members’ benefits and investing productively. This may include introducing additional flexibility for schemes.
“We believe this could be particularly beneficial to the 10 per cent of private sector DB schemes which remain open to new members and/or new accrual. Across the package of DB reforms, a broad range of changes have been proposed, including altering the role of the PPF, which provides such a vital safety net for members, in several ways.”
The PLSA says it will be important to consider how the combinations of potential reforms can work seamlessly together across the entire DB framework.
Pensions consultant Hymans Robertson also welcomed these potential reforms saying it was clear that the government saw the potential for superfunds to play a part in its wider objectives to stimulate economic growth in the UK.
The company’s head of alternative risk transfer Iain Pearce says: “It is good to see the Government moving to provide more clarity for the superfund regime to support decision making for providers and pension schemes alike.”
He adds: “The response demonstrates that there continues to be strong political support for superfunds. It appears eager to enable a wide range to develop.
“The Government has acknowledged that, in order for the superfund market to develop and thrive, there is a need for a clear separation in terms of pricing that could be offered by superfunds compared to insurers. This indicates that the regime may support superfunds to be around 10 per cent cheaper, in part due lower standard for security with a softening of minimum capital requirements.
“Providers will welcome the clear signposting of the preferred mechanism to allow returns to be extracted for capital providers, and trustees and sponsors will welcome the increased clarity on the advice requirement.”
