This is the question asked by my reliable correspondent “Pension Oldie”. Here is his comment on a post of mine on pension superfunds and capital backed journey plans.
He argues that consolidation through superfunds is much harder to achieve at scale than is imagined. By comparison allowing schemes to run on, with co-sponsorship and shared outcomes from a well-managed buffer, is a relatively simple matter.
Who are likely to be the capital providers?
Could it be that pension schemes be a source of capital? Obviously not for their own schemes – we would need the equivalent of employer related investment rules, but why should they not be able to gain from the potential return available to the capital provider.
Does this create any new systemic risks?
The Court of Appeal judgement in the Virgin Media case was handed down this week. While the industry appears to be viewing this as a purely technical matter in respect of s37 of the Pensions Scheme Act 1993 in relation to contracted out benefits. As I read it the judgement confirms that the actuarial certificate is required every time changes are introduced to the Deed. A failure to record confirmation that the pension promises reflected in the Deed during the service period have not been affected will render any amending Deed void.
This will surely match to any transfer of liabilities to a new pension provider, including rights to discretionary benefits. Even where a benefit is granted at the employer’s sole discretion, the employer cannot remove the right to the discretionary benefit (Imperial Group Pension Trust v Imperial Tobacco Ltd 1990).
This absolute right to receive all the benefits provided in the Deed during the service period gives great difficulty with any form of transfer out of the ceding scheme which does not precisely match the Rules of that Scheme. Hence discretionary increases to pension rights have to be be provided before buy-out (and in buy-out terms?) before any surplus can be refunded to the employer.
I believe therefore that the most likely form of capital backed journal plan will therefore be on a single scheme basis. The benefits of consolidation will therefore be somewhat limited – mainly effectively the capacity to invest in pooled funds with other schemes with the same capital provider. That is of course unless the benefits of the receiving pension scheme are such that the actuary can provide a certificate that no Member will be disadvantaged by the transfer.
“Oldie’s” point is valid, the legal obstacles to consolidation are substantial and so are the remaining obstacles embedded in the new guidance from the Pensions Regulator
The Gateway Test remains; the guidance states
“We do not expect a superfund to accept the transfer from a ceding scheme that can access buy-out or is on course to do so within the foreseeable future”
This substantially reduces the scope of consolidators to consolidate. It also perpetuates a misconception that under the funding rules laid down in this and previous guidance, the security offered by a superfund is at least as good as that offered by an annuity.
Indeed, as the rules governing the “matching adjustment” are eased , the security of the annuity will be further reduced. Add to this the propensity of insurers to outsource risk to funded reinsurance in offshore centers such as Bermuda and it is hard to understand why annuities are still spoken of as the “gold standard”.
And there remain conditions on the investment of the capital buffer that seem hard to understand. This is money that belongs to the general partner , typically of a Scottish Limited Partnership and is the engine for growth that returns a profit to the provider of the capital. The provider of capital should be entitled to take risk here at its discretion. It seems counter to the principles of the Manion House and of recent pronouncements from the new Chancellor, that such money should not be invested in long-term illiquid assets and provide productive finance to the UK economy.
Who will provide the capital?
There is a lot of detail in the new superfunds guidance but not enough to quite justify the Pensions Regulator’s claims
The organisations that will provide capital for capital backing are not philanthropic, they will have target internal rates of return on capital deployed and if these rates cannot be reached, the capital will not be offered.
This capital needs to be on the table to allow schemes to consolidate (superfunds) , to back schemes to run on (CBJPs) and to offer pensions to members of occupational schemes wanting pensions rather than pots.
There is much in the superfund guidance from the Pensions Regulator which could “boost market innovation in interest of savers”, not least its capital release expectations, the removal of the “standalone test” and proposed relaxations on capital adequacy for distressed schemes heading for the PPF.
But whether there is sufficient meat on the bone to properly answer Pension Oldie’s question remains to be seen.
I agree the Gateway Test is wholly inappropriate and may deprive Members of benefits they would otherwise be capable of receiving.
The Pensions Act 1995 defined the s75 debt on an employer ceasing to participate in a scheme in terms of the actuarial estimate of the cost of buying-out the Scheme’s liability with an insurance company to ensure that the Scheme had sufficient assets to pay the benefits as they fell due i.e., run-on, but to also give the Trustees the option, but only if they believed it was in the Members’ interests, to buy out the liabilities with an insurance company. Hence the s75 debt is purely an estimate at the triggering date and is not adjusted to match actual buy-out costs.
Even the Pensions Act 2004 envisages Schemes who are sufficiently well funded to run on indefinitely as a closed scheme, subject to PPF oversight of payment of benefits in excess of PPF protection levels.