The Government has radically changed its position on pension superfunds, at last giving feedback on its 2018 consultation and making clear that pension superfunds are helpful to pension consolidation and support the wider aims of the Treasury. The response to the 2018 consultation opens with this statement

A large and vibrant Superfund market however has the potential to introduce significant pools of capital into the UK economy. We believe that this approach would be a positive step from a wider public finance perspective.

A statement at odds with 5 years of Government policy

Despite Guy Opperman giving TPR interim powers to approve superfunds in 2020, in the past three years only one superfund- Clara- has been approved. Clara  has yet to do a single deal and its CEO announced in the press that unless it could get business on its books this year, superfunds would  have little future.

DB consolidation has not happened for three reasons

1. The ABI has tweaked the Bank of England’s tail to prevent progress on  pension superfunds
2. The Pension Regulator’s propose DB funding code has made DB master trusts commercially unviable
3. There has been no Governmental vision for pensions (until the Mansion House reforms) that encouraged change.

For these three reasons, we have continued with over 5,000 defined benefit pensions with the attendant costs of trusts, advisors and sub-optimal investment decisions.

The Pensions Regulator has now made it clear it wants a new industry mindset. Its CEO has published a blog that says as much. Its former Director of Policy David Fairs told Professional Pensions  yesterday he now sees the DB Funding Code as reaching the end of the line, Professional Pensions suggesting it’s a “solution to a problem that no longer exists”.

Despite this, the DWP continues to tread cautiously with regards consolidation. Its fear is that pension superfunds will abuse their status as pension rather than insurance schemes to offer buy-out on the cheap and after pillaging schemes for commercial gain, dump them on the Pension Protection Fund. This is more or less the line that the ABI has spun the Bank of England and its regulator the PRA.

This has given rise to the bifurcated vision for DB schemes where those who have the financial strength and size are bought out or run-off with limited sponsor support while weaker schemes are picked up by pension superfunds (consolidators) or fall into the PPF. This is graphically depicted by the Willis Towers Watson graphic at the top of this blog.

The DWP have their own version of the graphic which is in its consultation response.

The best funded schemes are not “in scope” for superfunds.

But rather than let the market make its own mind up, the DWP continues to propose a prescription that would stop a scheme that had become sufficiently funded to bought out by an insurer, to so much as approach a superfund. There will continue to be a Gateway test that will prevent well funded schemes from choosing to use the Pension Superfund.

• the criteria that have to be met to enter a Superfund, including rules to avoid giving some sponsors a choice between a Superfund and insurance buyout (the Gateway)

• that employers should never have a choice between the “gold standard” for security of insurance, and a weaker, cheaper option; where insurance buyout is achievable in the foreseeable future. We remain committed to this approach.

To my mind this is anti trust and anti competitive;- it doesn’t make sense in the context of the Mansion House reforms and it doesn’t make sense in terms of freedom and choice.

Imagine telling a DC saver to annuitize because he/she was well-off while telling the financially vulnerable saver they could use pension freedoms!

The choice facing a trustee and the sponsoring employer is a trade off that any business person makes regularly

If there is insufficient  risk to an employer or trustee in transferring liabilities to a Pension Superfund than to an insurer, why would an employer not want to provide members with the upside that results from a superfund getting it right?

If the answer is the gap between what an insurer and PPF guarantees, then it should be remembered that even an insurance company covenant can be breached. Insurers can and do go bust, FSCS is their PPF, while a bulk annuitant failing is unlikely, the consequences on FSCS could be disastrous.

Both sides of the trade-off are explored in a 2022 article in Pensions Expert where

Duncan Buchanan, partner at Hogan Lovells, explains that he and his colleagues work “on the basis that the PRA has a very strict and prudent approach to solvency levels, which is great news and gives trustees a lot of comfort when they are entering into a buy-in”.

“When I advise pension trustees because of the PRA’s strict solvency requirements, coupled with the existence of the FSCS, trustees of occupational schemes consider that they are moving to a more secure environment,” he says.

However, despite considering that the “PRA regulation is tougher than the TPR regime”, Buchanan questions whether the FSCS would be able to cope with the default of a buy-in/buyout provider.

“The FSCS is funded by an annual levy, which may well not be sufficient to meet a major claim,” he says.

The Gateway  appears to be the price of an agreement between DWP and Treasury. But is it a sustainable policy? I  think not – the Gateway must go

The landscape is changing- the DWP needs new evidence

As well as responding to the 2018 consultation, the DWP has issued a fresh call for evidence. In it, Laura Trott tells us

We are keen to explore some of the ideas which suggest ways in which sponsoring employers and DB scheme trustees can invest differently, and the choices we could offer to help them to do this.

Please consider responding to this call for evidence on whether there is scope to enable greater flexibility in how DB pension scheme assets are invested with the potential to work harder for members, employers and the economy.

This blog has been calling on the Pensions Regulator to release DB schemes from the tyranny of the DB Funding Code’s FastTrack restrictions since David Fairs announced them in 2018.

It has been calling for a proper framework for Pension Superfunds since the DB Consolidation paper in 2018.

It continues to call for DB schemes to have the pension freedom to determine their future from all options, including staying open, re-opening as DB, re-opening as CDC,  running off as a closed scheme, consolidating to a master trust with a view to buy-out, consolidating to a Pension Superfund with a view to buy-out or as run-off and buy-out.

The DWP recognize that some of these options allow DB assets to be invested more productively than others and that Pension Superfunds are cases in point. It is time that the DWP and Treasury drop the Gateway test and allow  DB schemes stakeholders to make choices about their future based on what they see best.

Pension Superfunds are not “poor man’s buy-out” and shouldn’t be marketed as such.