Kim Gubler says neither DWP nor TPR want a repeat of what happened with master trusts
Defined benefit (DB) pension market consolidation has led to the rise of superfunds. They were created to give companies more freedom, economies of scale and efficiencies in scheme service, while still protecting members' interests. Although there are less than a handful of these early adopters, market dynamics mean there'll be more to come.
The Department of Work and Pensions (DWP) sees the DB superfund proposition as a ‘gateway proposal' - for employers with small schemes, those who can't undergo a corporate transaction because of pension liabilities, or even where an employer is on the journey to buyout. Does this mean the days of walking away from liabilities are finally long gone? Before the birth of the superfund, employers with a DB scheme had to pay the cost of buyout, or be at the mercy of the vagaries of valuation factors. As with any company budget, there's a finite amount of money available and deficit contributions have certainly helped eat a hole in the British economy - with capital and human investment paying the price. DB superfunds will target strong companies with a good outlook, wanting to focus on their core business without distraction. Could it be that they're the best of both worlds? Enabling companies to plan for the future and safeguard people's pension benefits? Either way, it seems in this instance, the government is taking no chances.
No one anticipated how great the rise of the master trust would be. Despite being defined contribution, its authorisation regime is the backbone to the potential authorisation framework for DB superfunds and was developed to protect those members who won't have any say in the destination of their benefits. Neither DWP nor The Pensions Regulator (TPR) wants a repeat of what happened with master trusts. Where when it was almost too late, people realised they were largely unregulated and had already captured a significant portion of the market - and with that, a significant population of members. The master trust authorisation regime was designed to make sure only the strongest and ‘best' master trusts prevail. Thus, strengthening members' security. While we don't yet know the detail of the authorisation framework for DB superfunds, we have a pretty clear idea of what it'll include. TPR is tasked with supervision in the approach to authorisation. The DWP's consultation on authorisation has ended and, very soon after, we'll have more certainty on what the supply side of this new market must evidence to participate.
While no one knows what the size of this market will be, both DWP and TPR wants to ensure member security is not compromised in favour of de-coupling pension schemes from their employers.
Just as with the master trust authorisation model, DB superfunds will have to demonstrate they have robust administration systems and governance. But unlike master trusts, which simply need to be able to demonstrate scalability, superfunds' administration, IT, systems and processes will also need to be able to flex. Many will be a pipeline to buyout, as schemes enter - so too could schemes be exiting to an insurer. A successful DB superfund will have to be skilful in implementing and exiting schemes, as well as the bit in the middle. Like any occupational pension scheme, their trustees will be reliant on third party suppliers. Both employers and trustees of incoming schemes will need comfort their members will be protected - third-party administrators will be key to delivering this. Best practice administration will be fundamental to superfunds' ability to safeguard their schemes' members. As the sector grows, PASA will be engaging with its players to ensure the specific characteristics are picked up and developed within our standards and accreditation framework. We want to ensure members receive the very best outcome they can, regardless of where their benefits are administered so will be doing everything we can to help trustees, administrators and employers alike make the right decisions.
Kim Gubler is chairwoman of the Pensions Administration Standards Association
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