Kate Smith, Head of pensions at Aegon comments on the PLSA’s superfund model of consolidation. “Some Defined benefit schemes are under considerable stress and recently we’ve seen a host of solutions from the Government’s Green Paper. This has suggested allowing struggling employers to link benefits to CPI rather than RPI for example. Now PLSA is looking at more radical solutions to enable struggling employers to offload their DB schemes to a ‘superfund’ acting as a consolidator in return for a substantial one-off payment to bring their scheme up to an adequate funding level, which may prove to be unaffordable to struggling employers.
“But the only way DB scheme could be consolidated efficiently, is to simplify benefit structures across all members, creating many losers. DB schemes can be complex arrangements with different membership categories as well as different pension increases. Allowing employers to walk away from their DB schemes, creates a moral hazard, and needs to be treated very carefully by government and regulators. Removing the link with a sponsoring employer also removes DB schemes financial back-up plan, and could weaken members’ position. It’s absolutely fundamental that the funding and solvency of any superfund is robust with clear rules on who makes up the shortfall. “
Bob Scott, Chairman of the Association of Consulting Actuaries (ACA) comments: “The ACA welcomes the work that the Pensions and Lifetime Savings Association (PLSA) Defined Benefit taskforce has done and published in its recent report “The case for consolidation”. The ACA is broadly supportive of the concept of consolidation of some smaller schemes and we see conversion to a common benefit scale as an important precursor to that process.
“The PLSA proposes that the consolidator vehicle – the “Superfund” – should be separate from the employers who formerly sponsored the schemes. This raises the issue of who should bear the risk of the Superfund failing to meet its obligations. Insurance companies have to hold regulatory capital and are subject to strict financial supervision; ordinary pension schemes have an employer to fund them. Superfunds would have less capital than insurance companies and no sponsoring employers and so, if the available capital is not adequate they will fall back on the PPF.
“The PLSA proposes that entry into a Superfund should be a voluntary matter, decided by the trustees and employer following consultation with affected members. We support this structure, which means that smaller well-run schemes can continue to operate independently without being forced to join a consolidator scheme.
“Consolidation of pension schemes is also a key focus of the recent Defined Benefit Green Paper published by DWP and the ACA looks forward to working with Government, PLSA and other industry bodies as we move towards a system that balances the requirements and needs of different stakeholders.”
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