Consultants, trade bodies, and professional societies across the pensions industry have responded relatively positively to guidance from The Pensions Regulator (TPR) that has today signalled a clear start for defined benefit (DB) scheme consolidation across the UK.
Under the terms of the new guidance, consolidators will face a stringent set of standards under what the regular has called a "robust" regulatory framework to manage potential risks and to ensure members' retirement incomes are protected.
Pension Protection Fund (PPF) chief executive Oliver Morley said the lifeboat fund welcomed the government's long-term plans to legislate and set up a permanent regime for superfunds.
"We fully support TPR acting to set out clear expectations in its interim regime to protect the PPF and our levy payers in advance of that legislation," he said.
Hogan Lovells pensions partner Duncan Buchanan told Professional Pensions that the guidance was a long-awaited turning point.
"This is it now - I think employers and schemes will start to move into superfunds and that will be well-supervised by the regulator," he said. "Up until now there has been a roadblock, but I really think this is the beginning of superfunds which has been a long time coming."
Over recent years, Buchanan said the extra cost needed to secure a buyout has gone far beyond the reach of many employers, and was notable now given many members whose benefits have not yet come into payment.
"For those employers and their members, a superfund may be the next best option and improve security for members," he added.
"Trustees of schemes asked to agree to a transfer to a superfund will need to take specific legal and covenant advice to make sure that transfer would be beneficial for their members and an insured buy out is beyond reach.
"The involvement of TPR in both the transfer process (requiring formal clearance) and the ongoing supervision of superfunds will definitely assist trustees and should give reassurance to the transferring members."
A step forward
Pensions and Lifetime Savings Association (PLSA) head of DB, Local Government Pension Scheme and standards Joe Dabrowski said the guidance was representative of innovation within the sector, and praised the Department for Work and Pensions on following the provisions set out by the PLSA's DB Taskforce when it first floated the idea of superfunds nearly three years ago.
He added: "TPR has clearly given a great deal of thought to create an appropriate and affordable supervisory regime, which protects members and the PPF.
"Under strong governance and robust capital buffers, superfunds have the potential to strengthen the security of the millions of savers in DB schemes whose sponsoring employers face an uncertain future."
Aon risk settlement group partner John Baines said the guidance would allow trustees and sponsors to explore a more diverse range of options, "balancing the needs of both member security and very significant financial pressure" on corporate balance sheets.
Isio partner Mike Smedley added superfunds would ultimately give trustees more options to reduce risk on their schemes to reach the goal of better member outcomes.
"Superfunds create a valuable new option for company pension schemes," he said. "Billions of pounds worth of liabilities entered the PPF in 2019 and superfunds could well reduce this figure and become a home for schemes with trouble sponsors."
Pensions Management Institute (PMI) president Lesley Carline said the long-awaited focus on governance was central to moving the industry forward.
"The regulator has made no secret of its concerns about the standards of governance associated with small legacy DB schemes, and the consolidation of such arrangements would be a pragmatic route to addressing a long-standing issue," she said.
Despite this, Carline warned against TPR "thwarting its own objectives" by creating a "regulatory culture which were to disincentivise the creation of consolidators."
"While safeguarding members' benefits is an obvious priority, this should not be allowed to prevent commercial organisations from being sufficiently profitable," she said.
Society of Pensions Professional president James Riley added TPR would have to "strike a balance" on the strength of the regime.
"I expect industry view will differ on its appropriateness," he said.
On the trustee side, Dalriada professional trustee Charles Ward said the framework would be a welcome confidence boost.
"As trustees, the security of our own members' benefits is front and centre of all we do so it is encouraging to see governance requirements and financial standards being put in place," he said.
"Both suggest that these funds will need to be committed for the long term and managed in a prudent way."
Willis Towers Watson head of retirement Rash Bhabra added: "Trustees will be determined that superfunds should be a way to improve member security, not to allow sponsoring employers to walk away from their pension obligations on the cheap."
He said trustees would need to judge whether members' benefits will be more secure if they retain recourse to an employer whose prospects are unclear or if they take some cash which might not otherwise be available and rely on the superfund's capital instead.
"There will be cases where, on the balance of probabilities, it looks better to twist than to stick," he continued. "Clearly, this will not include schemes who can see a quick and realistic path to buyout."
XPS Pensions Group head of risk transfer Harry Harper agreed trustees could "take a degree of comfort" from the guidance.
"This marks a sea change in the risk transfer market and enables providers to offer both insurance and non-insurance solutions, or even a combination of the two, and there will doubtlessly be further innovation."
The regulator has set the bar high, according to Lane Clark & Peacock head of corporate consulting Gordon Watchorn, who said TPR had to strike a "tricky balance" between ensuring member security and allowing for a viable super fund market.
"This new framework is an extremely welcome step and will lead to considerable creativity in tackling the long-term funding challenges of Britain's DB pension schemes," he added.
Association of Consulting Actuaries chairman Patrick Bloomfield said TPR may even have erred on the side of caution with the guidance.
"In particular, it's that consolidators won't be allowed to extract profits in the first three years unless schemes are wound-up and with various controls around investment strategy," he said. "This will constrain the initial business models which consolidators are able to use."
The impact of coronavirus
While TPR's decision to release the guidance now cannot be looked at as a sole reaction to the economic severity of the coronavirus crisis, experts agree the correlation is timely.
Buchanan told PP: "I suspect it will help employers who are struggling. We have a large number of small schemes that inefficient and huge sums are spent on professional fees rather than being spent on members' benefits and if you combine them together, economies of scale are fantastic."
Bloomfield added: "It is particularly welcome that TPR has chosen to issue this now, as businesses grapple with Covid-19, recent unprecedented events have caused many previously sound businesses to face a worrying outlook.
"It is timely that TPR is making commercial consolidators a genuine option to consider, especially for businesses considering deals that could involve the PPF.
"It has the potential to be good for scheme members and good for the businesses that support them."
The impact of coronavirus on markets would also likely result in greater demand for the consolidation of DB schemes over time, added TPT Retirement Solutions business development director Paul Murphy.
"Sponsors and trustees are looking to benefit from these economies of scale which consolidation vehicles offer, such as cost-effective access to more efficient investment strategies, lower operating costs and robust governance," he said.
Smedley said the concern that superfunds "will eat the insurance industry's lunch" might be overstated, but added the concern was necessary ahead of a flurry of consolidation activity.
"The regulator is talking tough on governance and capital requirements to protect pension scheme members but it also needs to walk the tightrope carefully as superfunds won't offer the highest level of security of the current insurance route," he said.
Bloomfield was less confident on a rush of deals, but agreed: "Commercial consolidation should not be allowed to undermine the security of members' pensions, not create a cheap option for schemes that can afford to reach full insurance."
Pension Insurance Corporation (PIC) chief executive Tracy Blackwell was critical, calling the interim regime "very dissapointing".
"It does absolutely nothing to help ensure that members will have a higher chance of receiving their pension benefits. It is they, and not the corporate sponsor, who should be at the heart of the regulatory regime," she said.
PIC have long-held ongoing concerns with the superfunds, saying the model targets the sort of schemes that will benefit least from the operational synergies of consolidation, and citing challenges with meeting the PLSA's original objective.
Blackwell continued: "It is entirely wrong that this interim regime, which allows for-profit entities to operate within the not-for-profit pension scheme regulatory structure, has been published without any parliamentary scrutiny whatsoever.
"In my view, the right way to address the problem of the many underfunded and sub-scale defined benefit pension schemes is for a collective, not-for-profit vehicle that retains the link to the sponsor, perhaps overseen by the PPF."
Mercer partner Andrew Ward said the "detailed trade-offs" of following a consolidation path should be analysed on a scheme-specific basis.
"The interim regime should allow schemes to move forward in assessing these trade-offs, alongside other consolidation options such as sole trusteeship, fiduciary management, DB master trusts and bulk annuities, with more confidence than before," he said.
Lincoln Pensions director Adolfo Aponte questioned the timing of the guidance in light of current events.
"The drive towards greater innovation comes at a time when employer covenants and funding levels are being challenge by myriad factors, not least Covid-19, so this has to be done cautiously," he said.
"We can expect today's guidance to open the flood gates; as with any innovation however, there is ample room for unintended consequences and the emerging regime should ensure members are not left wearing the risk."
Carline added: "Consolidators should be able to remunerate investors without undue regulatory restriction if the superfund concept is to succeed. This aspect of today's announcement requires further clarification.
Any consolidation vehicle should be carefully regulated enough the sponsors and trustees have "necessary legislative confidence" Murphy added.
"Today's announcement is helpful, but caution must still prevail as these products remain untested. Other tried and tested consolidation vehicles such as those offered by insurers and DB master trusts provide most, if not all, of the benefits offered by the superfunds and have long established trac records of successfully operating in a highly regulated environment and do not require any legislative changes," he said.
"Providing these well-established solutions remain at the forefront of consolidation, today's announcement is welcome."
While consolidation might offer a good outcome for members, Scottish Widows director of annuities Emma Watkins said robust legislation remained key.
"The framework does set out some parameters on triggers to protect members' benefits, investment strategy restrictions, and limits on ‘value extraction'. However, severing an employer's liability to their DB scheme should only be done in extreme circumstances," she added.
"The gateway test should be instrumental in ensuring this regime isn't abused, yet it gets only the briefest of mentions in the final guidance.
"In the absence of robust legislation and clear protections from a stringent gateway, trustees will need to approach consolidation into commercial vehicles cautiously to ensure that they are confident that the employer covenant is being replaced by an adequate capital buffer to best protect members' benefits in the future."
Hymans Robertson head of corporate DB Alistair Russell-Smith said the lack of transactions so far had been due, in part, to "nervousness around consistency between the interim regime and where the final regime might land."
Furthermore, he added the viability of consolidators was "undermined when there is no long-term authorisation regime."
Despite water-tight legislation being potentially years away for the industry, Buchanan told PP the interim system could still function sustainably enough, however.
"TPR feels it needs something in place in the interim," he said. "But my hope is that this guidance will work so well that in the event we don't need legislation because the system works well and is well regulated and members get the benefits they are entitled.
"By moving pension schemes to a superfund, employers can focus on their businesses free of historic pension liabilities that consume significant management time and expense."
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