Helen Morrissey spoke to DB Taskforce chairman Ashok Gupta at the recent PLSA Investment Conference about industry reaction to its recent report
The recent publication of the defined benefit (DB) Taskforce's report The Case for Consolidation has been given a cautious welcome by the industry. The report advocates the creation of a series of industry superfunds in which schemes' assets and liabilities would be merged. Employers would pay a fee - either a one-off or series of payments and in turn they would sever their obligations to the scheme.
The superfund regime would benefit from scale, bringing in governance and investment efficiencies while theoretically bringing greater security to members.
While the proposed approach is more radical than many expected, DB Taskforce chairman Ashok Gupta believes that now is the time for such a move.
"All the feedback I have had so far has been very encouraging," he says. "Timing is everything with these things. In the past year we have had BHS and Tata Steel, and I think these high profile cases have made people realise there is a problem here that needs to be addressed. I don't think we would have had this even a year ago. As a result, I haven't come across anyone who has said that we are on the wrong track."
However, Gupta admits that some have questioned whether there is the political will to push through the necessary changes to make superfunds a reality. However, he believes the will to make such changes does exist.
"I think the biggest indicator is the recent issue of the Green Paper, which I think showed the government to be very receptive to new ideas," he says. "The paper contained a lot of information on consolidation so it is good to see the government does recognise the problem."
There are a wide range of potential superfund providers according to Gupta who believes the market could become extremely competitive.
"Superfund providers could be anyone who currently operates in the bulk annuity market for instance so that could be insurance companies, asset managers etc," he says. "What we don't know yet is how attractive this business model is for those people to come in and participate in. However, I do believe it will prove to be an attractive market and I think we could see a vibrant market grow up around this."
Gupta envisions a series of superfunds developing that could correlate across different market segments or type of scheme.
"So if we have £1.5trn of assets then why not have a superfund of £50bn?" he says. "I would envisage there being several superfunds. We want a vibrant market so for instance you could have a superfund aimed at the charity sector, very strong schemes or stressed schemes for instance. You could have an employer that currently has 20 different schemes within their business decide to combine them into one superfund and have it managed professionally. This could work if we are able to develop the right culture and ethos."
However challenges do remain to the adoption of superfunds - most notably in its communication. Gupta has been vocal in saying that members need to understand that the level of their DB benefits is not guaranteed. More understanding of the risks borne within DB schemes is vital.
"There are two key points," he says. "First of all the underpin you get from the PPF is not 100%. Members on average will bear 20% of the risk. If you have a chance today to take a transfer value or stay in a scheme then that is a big decision to take and members need a full understanding of the risk they bear when leaving and staying in the scheme. There is more we can do here to help people understand."
Another key area would be around the cost of joining a superfund. There are concerns that stressed sponsors might struggle to be able to afford entry into a superfund. This is an area Gupta says needs more work.
"There is still a lot of work to be done on fees as we have to balance affordability with certainty," he says. "The kind of level we illustrated was a 90% level of certainty as we feel that at that level it becomes attractive to employers."
Superfunds and the PPF
Another key consideration is how superfunds will interact with the Pension Protection Fund (PPF). What impact might the collapse of a £50bn superfund have on the lifeboat fund?
"Any sponsor of a superfund will need to put some capital at risk to safeguard benefits," says Gupta. "The regime would be supervised by The Pensions Regulator (TPR) and if that capital buffer was being eaten into then alarm bells would ring. This would lead to discussions on the best way forward. This structure means that even if a superfund were to go into the PPF it would do so in a healthier state."
Gupta also says there could be scope for the formation of a consolidator of last resort that would sit between superfunds and the PPF, which would further relieve pressure on it.
So while more work needs to be done to flesh out the idea of superfunds, there are real potential benefits in terms of efficiencies. However, sizeable challenges to its adoption remain. At the PLSA Investment Conference, TPR chief executive Lesley Titcomb said the regulator would have to "look carefully" at how it could regulate such a regime. Others have expressed concern over whether employers should be allowed to effectively walk away from schemes for a fee.
So while the general direction of travel has been praised it is clear there are major areas the DB Taskforce must address in its future work in this area.
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