Work and Pensions Committee (WPC) chair, Stephen Timms, has written to the Prudential Regulation Authority's CEO Sam Woods, asking him to clarify whether or not the watchdog is satisfied with the government's position on defined benefit (DB) pension consolidation.

Timms requested that Woods makes it clear to what extent the Department for Work and Pensions' (DWP) response to its consultation on the matter published in July 2023 diverge from the views set out by the PRA back in 2019.

He also asked whether any new risks have emerged since the initial consultation in 2019;
what The Pensions Regulator need to be alerted to in regulating pension superfunds; and if Woods is of the view that the PRA should regulate pension funds.

In addition, the WPC wanted to find out what the PRA would have to do differently if bodies under its remit were to set up pension superfunds and if the PRA has been in close discussion with the government over the matter.

Finally, Timms has queried whether pension scheme consolidation has been discussed in the Prudential Regulation Committee or the Financial Policy Committee.

The PRA's 2019 consultation response on DB consolidation saw it raise a number of concerns.

Firstly, the watchdog said that the risks faced by DB consolidators were similar to those managed by insurance companies providing annuities. As insurance companies may want to enter the DB consolidation market, it warned there could be unintended consequences if the two types of businesses were regulated differently.

Secondly, it strongly urged the Government to adopt a framework for DB consolidation that created similar regulatory powers as those found in the insurance regime. This is partly due to the possibility of
consolidators calculating prudential requirements in the same manner as insurers.

Thirdly, the PRA said it was very challenging to minimise the risk of arbitrage between regulatory regimes.

"In this case, there is a risk that more pensioners may not have the chance of greater security enjoyed by those with annuities, backed by insurance regulation," it said.

As a result it said the option of consolidators acting as a bridge until schemes were strong enough to buy annuities from insurers would be the most effective in mitigating the risk of regulatory arbitrage.

Timms gave Woods until Wednesday 4 October to respond to the questions.

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