Disagreement between the government and regulators has cast a question mark over the future of the UK’s defined benefit commercial consolidators.
Pension consolidation has been a priority of the Department for Work and Pensions, but the Financial Times reported on Tuesday that differing opinions on capital adequacy requirements have stalled progress.
Commercial consolidators, such as Clara Pensions and The Pension SuperFund, do not need legislative change to accept schemes, but are understood to want to have the full backing of the Pensions Regulator and the government before proceeding.
David Fairs, the watchdog’s executive director of regulatory policy, analysis and advice, said the regulator is in weekly meetings with the government and the Prudential Regulation Authority to resolve the differences of opinion, according to the FT.
There needs to be clear water between superfund pricing and insurance pricing for superfunds to take off
Alistair Russell-Smith, Hymans Robertson
The PRA has previously called for consolidators to be regulated under the Solvency II insurance regime, which would raise capital costs to the same level as bulk annuity insurers and effectively kill the market.
A TPR spokesperson later dampened down the speculation, although they admitted the body is “working closely with government departments and other agencies... [to] address the issues presented by the regulation of DB superfunds to achieve a framework that balances employer affordability, member protection and attractiveness to investors”.
While superfunds do not need primary legislation to begin separating DB schemes from sponsors, they have been advised to seek regulatory clearance in order to avoid falling prey to TPR’s moral hazard powers later on.
The spokesperson emphasised: “We need to give savers confidence that these schemes are well-governed, run by fit and proper people, and are backed by adequate capital.
“We are working hard to assess the two emerging superfunds and aim to have completed this by the end of the year. From the start of 2020, we will then review any application from an employer for clearance to transfer into a scheme.
“We would expect all proposals to have the full support of the scheme trustees and provide better outcomes for members,” the spokesperson added.
Adam Saron, Clara 's chief executive, said: “We echo The Pensions Regulator’s sentiment that consolidation is a force for good and will provide safety and security for pensions members. We continue to work closely with TPR towards securing pre-authorisation approval, and with the DWP and Government in developing an overarching pensions regulatory regime for the future.”
Meanwhile Anthony Barker, managing director for asset and liability management and solutions at the Pension SuperFund, said that recent analysis it commissioned from Redington - which found that a superfund portfolio would be more resilient to market shocks than that of an insurer - should put some concerns about excessive risks to members to bed.
"Holding extra capital to protect members from adverse outcomes is a good thing, holding (and so charging) more just because you are limited by regulation from not using normal risk management techniques, such as asset diversification, is not," he said.
Overregulation will see funds disappear
In the end, the government will have to decide whether it wants superfunds to exist, and what purpose they should serve.
In its consultation launched late last year, the DWP envisaged superfunds as appropriate for DB schemes that have little hope of winding up through buyout – the market controlled by Solvency II and the PRA – in the near future, either due to funding or covenant concerns.
Richard Farr, managing director at Lincoln Pensions, explained: “Under the insurance regime there are strict capital guidelines in accordance with European regulations. If capital requirements are the same as for insurance there is no price advantage for the superfunds.”
He adds: “The regulator has to make a call on what it says is good enough… which then becomes a standard to look to. That is why it is having these detailed conversations. We are now at crunch time.”
Allowing superfunds to operate under more relaxed capital requirements might increase the risk of a consolidator collapsing and entering the Pension Protection Fund. But regulating the sector out of existence might mean that a similar number of schemes fail to reach buyout by the time their sponsor collapses.
Mr Farr said: “If the only option is buyout or nothing, quite a few schemes won’t survive.”
Member interests front and centre
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, the actuary for Clara, said: “There needs to be clear water between superfund pricing and insurance pricing for superfunds to take off. Part of the rationale for superfunds is to improve funding levels, reduce investment risk and improve member security across UK DB schemes.
“In our experience, some of the early transactions are being held up by uncertainty over the final authorisation regime for superfunds. This is because it is a far more difficult decision for pension scheme trustees to give the employer a clean break and transfer into a superfund when there is uncertainty over the authorisation regime.”
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He added: “There is an interim process in place for transactions – to follow regulatory guidance and obtain regulatory clearance. So transactions can happen now.”
Charles Cowling, director at Mercer, warned that any transaction “has to be in trustees’ and members’ interests. These superfunds provide a very high level of security but it is not as absolute as the insured alternative.”
