The Pensions and Lifetime Savings Association (PLSA) has advocated a "full merger" of defined benefit (DB) schemes which splits employers from their burgeoning obligations.
The suggestion was made in the second report from the association's DB taskforce, The Case for Consolidation, which follows its interim report last October which said the DB system was too fragmented.
The taskforce has distanced itself from the commonly suggested consolidation models where services are shared, assets are pooled, or there is a single governance mechanism but multiple sponsors. It argued they "will not, by themselves, address the £800bn shortfall in DB pension scheme funding or the risk of sponsor default".
Instead, it has put forward the "bolder" idea of a "superfund" where all assets and liabilities are consolidated, schemes are separated from their sponsors and there is one sponsor.
These superfunds would be available for DB schemes in all situations to enter into, subject to employers paying a fee either upfront or via secured debt, then providing a "clean break" of the employers' duties to the scheme. For sponsors who might struggle to afford the entry fee, the PLSA suggests they could "raise capital from markets or creditors to enable a transfer to a superfund".
Merging into a superfund would also be dependent on achieving a "tripartite agreement" between the incoming scheme's trustees and sponsor, and the superfund. It could also only happen after consultation with members.
The superfund would then hold negotiations to align scheme benefits and agree an actuarial equivalent conversion. Benefits would be measured along a standardised measure and common indexation, revaluation and survivors' benefits rules.
The giant scheme would also need to be authorised and supervised by The Pensions Regulator (TPR), similar to what is being set out for master trusts in the Pension Schemes Bill.
The taskforce also recommended the superfund would have to pay the Pension Protection Fund (PPF) levy, but had not yet decided how this would be done or considered if claims to the PPF might reduce through the creation of superfunds.
It added that a superfund may also be able to benefit from protection similar to that afforded by the Financial Services Compensation Scheme (FSCS).
The paper said such a fund would be "considerably less expensive than seeking to buy out and more achievable for willing sponsors".
PLSA's breakdown of consolidation models
DB taskforce chairman Ashok Gupta said a superfund would improve the odds that savers in weaker schemes receive benefits in full. At present, these members have a 50:50 chance of getting full benefits.
"We think the biggest gains lie in the merger of schemes, into what we have called superfunds," he continued. "We believe superfunds have the potential to offer great benefits to members, employers, the regulator, the industry, and the economy.
"Members get a better chance of more pension benefits being paid. Employers get a lower cost alternative to a buyout. The regulator gets a sector with better managed risks. The economy benefits from improved investment by superfunds and employers are freed from onerous DB burdens."
Nevertheless, the PLSA noted legislative barriers to consolidation would need to be removed to achieve this model. It said it would push the government to make changes to enable the setting up, authorisation and supervision of the funds.
It would also seek new rules to require trustees to demonstrate to TPR and their members that their scheme is delivering value for money. Where the trustees are failing to meet benchmarked efficiencies, and there are no extenuating circumstances, TPR should be able to intervene and require them to improve within a year or consolidate their scheme into an alternative.
It also called for the government to simplify rules and guidance on re-shaping scheme benefits and for common frameworks on the meaning and requirement of member consent.
The association said it would put all of these proposals into its response to the government's green paper on the DB sector and future regulation, which agreed with the benefits of consolidation, but said it should be under-taken on a voluntary basis.
PLSA director of external affairs Graham Vidler said the taskforce would be doing more work to shape its superfund idea.
"The taskforce was asked to think about the solutions and it has - including the new and bold idea of superfunds," he said. "There's work to be done on developing the superfund idea and the taskforce will be analysing it in detail over the coming months so we can contribute fully to the government's green paper consultation."
The PLSA will also present this report at its investment conference on 9 March.
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