The majority of law firms surveyed believed schemes would prefer consolidating
Defined benefit funds with weak sponsors are “overwhelmingly” likely to consider superfunds as the most suitable path forward to preserve scheme stability, Willis Towers Watson says.
Its survey of 11 pension law firms found the majority (9 out of 11) believed schemes would prefer consolidating to establishing an insurer led buyout or entering the Pension Protection Fund (PPF).
On the back of its findings, Willis Towers Watson head of pension risk transfer Ian Aley said trustees should dedicate time to considering a ‘plan B' for superfunds should their sponsoring employer weaken or fail.
"While 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 it, many trustees are surprised at the haircut to benefits different members may receive," he added.
Aley noted that while trustees typically consider funding on an aggregate basis, the average pension benefits in value terms could be as low as 60-70% for someone aged between 50 and 55.
"Even for schemes that have a headline funding position of over 100% funded on a PPF basis, it's much lower than some trustees might have imagined," he said.
Willis Towers Watson also found legal experts were split on whether schemes with insolvent sponsors should consider running themselves as a scheme without a substantive sponsor (SWOSS).
A third of survey respondents agreed trustees should be able to establish as SWOSS mechanism immediately, while 18% said PPF assessment should be a first step, and half were unsure.
Where a scheme did not expect employer insolvency but it could also not be ruled out entirely, 9 out of 11 law firms said schemes should consult with The Pensions Regulator before making contingency plans.
Aley said the greenlighting of superfunds now meant the industry "may finally have a strong contender as an alternative to a PPF+ buyout".
"And it could deliver materially improved outcomes for members," he 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 becomes necessary to act then mobilising quickly and effectively can have real benefits for the long-term security of the scheme and its members."
