The PLSA’s proposal to consolidate weaker defined benefit pension schemes into a superfund “creates a moral hazard”, it has been said.

Commenting on the PLSA’s DB Taskforce report, published yesterday 28 September 2017, Aegon head of pensions Kate Smith said: “Consolidation of weakened defined benefit (DB) schemes into a superfund may look like an attractive option to some stressed companies, but giving employers an option to walk away from their DB schemes creates a moral hazard that needs to be treated very carefully by government and regulators alike.”

Smith added that cutting the ties between a pension fund and its sponsoring employer would also eliminate the schemes’ “financial back-up plan, and could weaken members’ bargaining position” if the superfund were to experience funding difficulties.

Also commenting on the potential introduction of superfunds for consolidated DB schemes, Hymans Robertson head of trustee consulting Calum Cooper noted that it has the potential to improve member outcomes for those with weak covenants and funds that are less likely to pay benefits in full.

However, Cooper said that “each scheme would need to undertake its own analysis to determine whether this is the right route for them. It’s now over to the industry to innovate sustainable superfund solutions.”

Smith shared a similar view: “It’s absolutely critical that the funding and solvency of any superfund is both robust and supported with clear rules on who would make up any shortfalls to ensure trust and confidence in pensions.”

Nonetheless, Cooper opined that the PLSA’s proposal could make it “easier and less costly” to get economies of scale by either transferring DB scheme risks to an insurer or to a superfund consolidator. “But inevitably there will be winners and losers amongst individual scheme members,” he concluded.

Moreover, the industry has broadly welcomed the report’s suggestion to make benefit structures simpler and the addition of a chair’s statement.

JLT Employee Benefits head of technical John Wilson stated: “We welcome this contribution to the DB ‘black hole’ debate. In particular, we support benefit
simplification as a realistic option for addressing pension scheme deficits.”

Lincoln Pensions CEO Darren Redmayne discussed the chair’s statement further noting that “as well as addressing areas such a governance, investment performance and cost transparency, such statements should also comment on the strength of the employer covenant, given the reliance members have on it. The time is approaching for covenant ratings to be more publicly available to members of particularly stressed schemes, rather than it just being on the trustees and sponsors’ radar.”

In terms of the PLSA’s proposal to exchange covenant for funding, Redmayne commented: “The idea of exchanging covenant for funding is at a nascent time. What is being proposed is that the covenant of stressed schemes is “sold” for money into the scheme without needing a regulatory process. I think members would need some form of “fairness opinion” from the covenant firm advising on the price to say that they believe selling for a particular amount of money is in the interests of the members. Covenant firms - and the wider pensions industry - will need to take responsibility for ensuring that the value paid doesn’t turn out to be, in years to come, too cheap.”

Wilson agreed: “Proposals to exchange covenants for funding are more controversial. There will be concerns over security of members’ benefits and scepticism that this will just end up being reduction of benefits ‘through the back door’. There are also the issues of regulation and the ability to offer a cheap form of buy out without the reporting and reserving that applies to insurers.”

A spokesperson for The Pensions Regulator concluded: “However, we are clear that while the majority of DB schemes remain affordable, many should do more to tackle increased deficits and reduce risk to pensioners. We are prepared to use our powers where employers and trustees fail to tackle problems.

“We will continue to engage in discussions with government and industry in the months to come, including on how scheme consolidation can help protect member outcomes.”

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