Sam Woods – a great banking regulator

The Treasury Select Committee runs a sub-committee on regulation that met yesterday (14/09/23). You can watch proceedings from this link.

The key interlocutor is Sam Woods, Deputy Director of the Prudential Regulation Authority (the Bank’s Regulator)  who is a very good banking regulator.

But he doesn’t seem to know  much about secondary banking and in particular  how the UK occupational pension system works.

Early in the session, Sam Woods is quizzed by Harriett Baldwin, the Chair as to the PRA’s position on the Mansion House reforms and in particular its attitude to pension consolidation via commercial superfunds.

Harriett Baldwin suggests to Sam Woods that he is known for “pouring cold water on superfunds“. I had expected a rebuttal, but after a short nod to the sense of widening choice for trustees , he demonstrates that “cold” should be replaced by “icy”

He displays deep disquiet about pension superfunds in marked contradiction to the consultation documents issued by the DWP (in particular the DB options consultation).

The Government is supporting the development of superfunds for those schemes for whom there is no realistic prospect of buying out on the insurance market. In this call for evidence the Government is exploring the potential benefits and drawbacks of a public sector consolidator. Through the design of a public consolidator the Government may be able both to ensure investment objectives are met and promote long-term investment timeframes that would support investment in UK productive finance.

The PRA clearly does not take this view. In practice it sees suprefunds as a problem. That problem is that if pension superfunds start competing successfully to consolidate DB pensions, the insurance companies will set up their own pension superfunds which will – should they go bust,- lead to claims on the sponsoring insurer causing structural weaknesses.

He insists throughout that he considers insurance provides a higher level of member protection than superfunds. Superfunds strenuously deny this. There is no-one to contradict him despite the Pension Regulator’s statement that it “sets the bar high“. In practice the bar is set so high that no superfund has yet been able to do a deal.

The PRA’s position  is misguided and wrong.  This is what would actually happen if a superfund failed, thanks to Pinsent Masons

DB superfunds, as occupational DB schemes, are expected to be eligible for the PPF. This is supported by the fact that the PPF has published a methodology for calculating the PPF levy for DB superfunds.

In practice, PPF entry will probably be a remote possibility for DB superfunds. This is because DB superfunds are required to include provisions to automatically trigger the winding up of the scheme before the funding level drops below the level for PPF entry and the proposed capital adequacy requirements are sufficiently stringent to make the risk low. Nonetheless, trustees will want to check this point.

So should an insurer decide to set up an insured superfund, the superfund would go into the PPF and not be a liability of the insurer and its annuitants.

But this supposes that an insurer would want to set up a superfund to compete against itself as a provider of buy-outs. They are unlikely to do this, especially if they are already reserving for their DB staff scheme. If the PRA fears that insurers would head this way , they can quite properly speak with the Pension Regulator to work out if there is additional risk and – should that become apparent – explain what that risk is.

In any case, the PRA’s new reason for objecting to superfunds looks spurious. The DWP should be focussing  on getting primary legislation in place and in the meantime ensuring that TPR’s guidance is fit for purpose, has a revised gateway, allows superfunds to make a profit and reviews the capital requirements.

It would be helpful for the PRA and the BOE to roll their tanks off the lawn.

A bad look for Government

The reason why the Mansion House reforms are being proposed is to provide better pension outcomes for members and at the same time, ensure that pension schemes provide capital to parts of the British economy that needs it. The £100bn target set by the Government for such capital is not coming from buy-out. The PRA make if clear that even when the matching adjustment is diluted and insurers have more capacity to invest in illiquids, they are unlikely to invest in the kind of productive companies the Government wants to be invested in.

Sam Woods tells the Treasury Select Committee it is not the PRA’s business to monitor, let alone enforce, illiquid investments by insurers. Charlotte Gherkin points out that there are several types of illiquids that are more attractive to insurers than venture capital. In short, the buy-out of the UK occupational pension schemes by insurers is not furthering one of the main thrusts of the Mansion House reforms.

Blocking the progress of applications to be superfunds is obstructing an opportunity for these occupational funds to invest in the productive capital they are designed for.

To add insult to superfund injury, Sam Woods states later in the session that were the insurance industry to have bought out occupational schemes as they intend to do by 2022, the risks of LDI would have been mitigated.

It is such a bad look for Government when its regulators, the PRA and TPR seem actively against what its legislators, the DWP , Treasury and most of all Parliament are trying to achieve.

It is even more of a bad look , when  the basis of the PRA’s objection , is so ropey.

tanks on the lawn