Pension lawyers view DB superfunds as strong ‘plan B’

UK pension law firms believe that defined benefit (DB) superfunds will become a strong consideration for schemes with struggling sponsors as an alternative to the Pension Protection Fund (PPF) or buyout.

A survey of 11 pension law firms by Willis Towers Watson found that nine out of the 11 companies thought trustees should dedicate time to considering a ‘plan B’ in case their sponsoring employer weakens or becomes insolvent.

All the legal firms surveyed felt that DB superfunds should have a “big role” to play in those contingency plans, once they have received approval from The Pensions Regulator (TPR).

Willis Towers Watson noted that lawyers’ encouragement to consider a plan B reflected some trustees’ concerns around increased sponsor covenant issues resulting from the Covid-19 pandemic.

“Whilst the PPF is a highly valued safety net here in the UK, when we show trustee boards the impact on benefits at an individual member level in the event of entering the PPF, many trustees are surprised at the haircut to benefits different members may receive,” commented Willis Towers Watson head of pension risk transfer, Ian Aley.

“This is because trustees typically consider funding on an aggregate basis and even for schemes that have a headline funding position of over 100 per cent funded on a PPF basis, the average pension benefits in value terms for someone aged between say, 50-55, can sometimes be as low as 60-70 per cent of full benefits - much lower than some trustees might have imagined.

“After several years of scrutiny, the industry may finally have a strong contender as an alternative to a PPF+ buyout, which could deliver materially improved outcomes for members.”

However, there was some uncertainty about whether schemes with insolvent sponsors should immediately start running themselves as a scheme without a substantive sponsor or whether they should enter PPF assessment before making a decision.

Four respondents believed schemes should immediately start running as schemes without a substantive sponsor, two thought they should enter PPF assessment first, and five said they were unsure.

Nine of the 11 firms stated that schemes where employer insolvency was not expected but could not be ruled out should consult with TPR before making any firm contingency plans.

Aley added: “It’s clear that where there is increased uncertainty over sponsor security, contingency planning for financial shocks is as important as ever for pension schemes.

“If it became necessary to act then mobilising quickly and effectively can have real benefits for the long-term security of the scheme and its members.”

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