Headline on 28th of September 2022. When de-risking through leveraged LDI exploded. Pension terror runs on in parts of pensions.

Excuse me in strolling into an area for defined benefits that I call “pension capitalism”. I am not a financier, I am not an actuary, I am someone who sits at the other end of the process, helping ordinary people to pensions. But I see capital waiting to be deployed to help pensions to grow and I see capital backing as a different plan than keeping pensions out of the PPF. We have moved on. 

Back in 2020, I was writing blogs asking whether superfunds could help DB schemes out of trouble.  If the legislation to let superfunds take on struggling schemes had gone into place, superfunds would almost certainly have worked.

Below is what superfunds were about, the chart was produced by the DWP in 2023 to define the superfund market . In 2023, schemes already were in better shape, we just hadn’t seen the funding reports which we see now. The opportunity had been in the period between 2018 and early 2022 and if superfunds had replaced geared LDI with more sensible funding, we might not have had the crisis.

The historical market for superfunds to work in 2023

Ironically, pensions are no longer in a funding crisis for the reason that caused the September 2022 crisis. High gilt yields have reduced funding problems, there is £14bn worth of capital in the PPF, £160bn of surplus in private DB schemes. Despite the crisis of late 2022 and the imbecility of gearing to stay safe, we are struggling with pension capital as a means to grow!

A problem with the model – there are no customers for would be superfunds?

There is a problem for the Government with superfunds, there’s too small a market for them to operate as a privatised PPF.  You recognise the slide above? It was constructed when the world of pension schemes seemed underfunded. That world doesn’t seem so at the moment. So the Government has had to consider how to get pension superfunds into existence and it has found an answer. Change the interpretation of “superfund”. This is from Section 4 of the Pension Schemes Bill

Deep in the bowels of the beautiful and big animal known as the Pension Schemes Bill is this wonderful magic! It’s amazing what you can do with “interpretation” to “generally provide” the market with pension superfunds!

We can call anything a bit like a superfund a superfund and it can live under the superfund legislation being drawn up.

A definition problem – solved by “interpretation”?

Those familiar with recent superfund history will note that of the two superfunds, one has become a deferred annuity plan – AKA “Clara” and the other withdrew its application in frustration “Pension Superfund”. Otherwise we have no superfunds and there was no prospect of superfunds anytime soon.

Except now we now  have 89 schemes that are partially under the sponsorship of capital backing.

As far as I can see, this means that defined benefit plans that have taken on pensions from other employers. Now this is likely to have wide application – there are nearly 100 such schemes in the UK.

This goes way beyond what is outlined in the Roadmap where there is very little detail

We don’t need to worry about creating a superfund market when you can include a whole range of existing funds which were never meant to be superfunds and now are that because of “interpretation” to get “general provision”.

This may be the objective, but if these schemes that have consolidated or simply released sponsors from their obligations by taking on obligations are to be called “superfunds” then we have confusion. Can schemes run on backed by capital without being superfunds? The answer seems to be no! This is an area for clarification  in the Houses of Parliament.

As I see it , there are a number of players in the market prepared to back other pensions with capital to keep them running on, help them invest to a point where they can release capital to pay better pensions or drive growth for all concerned with the sponsor.

This “capitalism” is the essence of what Reeves and Bell are after. To mix up the purpose of superfunds with that of capital backed journey plans looks an outreach from those in legislative power. Interpretation of “superfunds” to include capitalism looks to me a means to stymie not promote growth. We have seen the endpoint of superfunds in Clara, it is a transit to buy-out.

I can understand concern that without a capital buffer the PPF is unprotected but where there is a buffer and one visible to TPR then need we legally define joint sponsorship of a capital backed journey plan as a superfund?  Does the Bill see  employers strong in  covenant finding themselves caught up as superfunds because they rescue schemes their sponsor also has responsibility for through merger?

I am confused and while I am a total novice in pension capitalism , I sense an unresolved argument about definitions that is going to  get in the way of progress. There appears to be an underlying wish in parts of Government to promote de-risking and hinder growth and that is not in the spirit of the Pension Schemes Bill.