Superfunds could be ‘game-changing’ following consultation

Written by Jack Gray
07/12/2018

New defined benefit pension superfunds could “offer a game-changing opportunity” to improve people’s pension security “and should be encouraged”, according to Royal London director of policy, Steve Webb.

His comments came after the government released its consultation paper on DB consolidation, in which it detailed plans to adopt a system similar to defined contribution master trust authorisation.

He added: “Combining schemes into a much smaller number of superfunds could make the process much more efficient and improve the chance that pensions will actually be paid.”

Webb warned, however, that the government must “make sure that such schemes are well run and well overseen” to make them a success.

The consultation paper was generally met with praise and excitement from industry members and this sentiment was echoed by JLT Employee Benefits director, Rob Dales: “Superfunds present a potentially attractive option for pension schemes with employer covenants that are ‘under pressure’ and it is encouraging to see a sensible, thought out proposal for a regulatory regime.

“The superfund could have application to the full spectrum of employer covenants and, in the right circumstances, can lead to improved benefits for members.”

Pensions and Lifetime Savings Association head of DB, LGPS and standards, Joe Dabrowski added: “The consultation provides welcome detail on the government’s White Paper proposals.

“The regulatory framework as set out should provide protection for members’ benefits, ensure the Pensions Regulator can run a robust authorisation and supervisory regime, and deliver affordable new options for schemes and their employers.’’

One thing that most people agree on is that DB scheme superfunds must be well governed to become the change that members want to see and the transition could be complex.

Pensions Management Institute vice-president, Lorraine Harper commented: “As superfunds start to grow in number and popularity it is critical that the framework by which they are managed and governed has to be robust.

“In this regard the appointment of professional trustees with expertise in managing pension investments, employers transferring eligible schemes to superfunds having to provide a cash injection, and third party investors needing to supply an additional ‘capital buffer’ in exchange for a share of any profits, are all welcome measures.”

Lincoln Pensions CEO, Darren Redmayne, highlighted how complicated the situation could be: “The potential exchange of a sponsor covenant for a consolidator covenant is complex and very situation specific and a one-time irreversible transaction – it is no surprise therefore that any trustee will require robust and detailed covenant advice, as well as looking at other credible options before taking any decision.”

However, some in the industry believed that caution should be exercised in regard to governance.

Dales said: “Whilst there needs to be a regulatory framework which ensures prudent behaviour, it shouldn’t be so overbearing that it forces superfunds, in effect, to become insurance companies, as this would destroy any reason for them to exist.”

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