By Joe Dabrowski, Head of DB, LGPS, and standards at the PLSA.
Aside from the constant, almost deafening chatter surrounding Brexit, the Department for Work and Pensions consultation on defined benefit consolidation – or superfunds – has been the talk of the pensions town over the past few weeks.
Yet amongst all the heated debate about the important details of what consolidation vehicles should look like, there is a real danger that we miss the wood for the trees.
So it is worth retracing the conclusions of DWP’s green and white papers, and the work of the Pensions and Lifetime Savings Association DB Taskforce, that has brought us to this point.
After nearly two years of in-depth analysis and discussions across the sector, both concluded that DB schemes and their sponsors have faced an incredibly challenging decade, but that the majority of schemes and employers should successfully deliver member benefits in full.
But – and it is a big but – a significant minority of schemes and employers will face a harsher reality. Research and analysis by the taskforce highlighted this risk in particular, identifying approximately 3m members in schemes with weaker employers having a 50/50 chance of getting their full benefits.
Something must be done
Members whose employers suffer an insolvency event will of course be protected by the Pension Protection Fund, but they will likely incur a 20 per cent reduction in their pension over their lifetime.
These schemes cannot achieve, or afford, buyout either now or in the foreseeable future – and over the longer term they will, without change, have to hope for the best with their employer and seek to stay the course with their recovery plan. So the question is: what can we do to help them?
The answers are of course legion, and dependent on particular circumstances. However, both the DWP and the DB Taskforce concluded that new solutions are needed – and consolidation vehicles or superfunds should be a major part of that.
The key goal is to provide greater security for schemes with weaker employers, and to establish a challenging but achievable goal for employers to accelerate funding into their scheme in exchange for greater certainty over their ongoing obligations.
The location of this sweet spot between security and affordability remains hotly contested and will be one of the toughest areas to legislate on.
However, the key issue is: will members be in a better position after transferring to a superfund than they were before?
If that means moving from a position where there is a 50 per cent probability of receiving full benefits to a 95 per cent chance, then that will be a substantial and worthwhile improvement.
Regulation must be robust
Delivering pensions is a long-term game, so the new regulatory framework must have a tough governance regime to make sure the right types of providers emerge, and saver interests are at the forefront of provision.
So it is pleasing to see that the DWP has drawn on the robust authorisation and supervisory regime that has been put in place for DC master trusts, which looks after the benefits of 10m savers.
We are of course also in the early stages of the evolution of superfunds, so it will be important to retain some flexibility to allow the market to grow, within suitable parameters, to provide schemes with choices for the best solution to their needs.
Without this there is the risk that innovation is stifled, superfund models end up being too similar and market growth is stunted before it can contribute to addressing the challenges in a meaningful way.
New things can often be scary, but it is clear that if new ideas and bold solutions are not part of the way forward for DB schemes and employers, we will likely repeat many of same difficulties of the past decade.
The framework will need fine tuning, and there will no doubt be many more knotty issues to chew over, but the introduction of a formal regulatory regime for superfunds is to welcomed as an important and positive step forward to improve the prospects of as many members as possible, and especially those most at risk.
This article first appeared in Pension’s Expert.