In the Society of Pension Professionals’ (SPP’s) latest column for Professional Pensions, the organisation’s president says it is important to allow the superfund market to develop and innovate before deciding whether there are gaps that need to be filled.
In July 2023, the government published its long-awaited response to its December 2018 consultation on defined benefit (DB) consolidation, ending what must surely be the longest-ever pensions consultation.
In its response, the government has reiterated its support for DB superfunds and has committed to establishing a fully regulated regime for their operation.
The Pensions Regulator has also revised its DB superfunds guidance, which sets out how it will regulate DB superfunds prior to a legislative framework being in place. This interim guidance was originally published alongside the 2018 consultation, but at the time of writing, no DB superfund transaction has been completed. The revised guidance may help to address some of the barriers to schemes successfully completing a transaction, and hopefully we will see the first deals soon, but a commitment to establish a properly regulated regime is nevertheless welcomed.
The establishment of a viable DB superfund regime would provide a valuable additional option, with the potential to improve member security and manage pension liabilities in an affordable way. However, it won't be the right option in many cases, and the combination of funding and sponsor covenant required for a DB superfund transaction creates a ‘goldilocks zone' for a transaction to be feasible. The goal for most trustees and sponsors seeking to settle their liabilities will be an insurance company buyout, and it remains to be seen whether DB superfunds will be a niche product or a mass market solution.
The government is separately consulting on the possibility of a public consolidator, for those schemes for whom an insurance company buyout or DB superfund solution is not viable. The only justification for such a vehicle would be a dysfunctional market, and any public consolidator would need to be carefully designed to avoid disrupting the existing bulk annuity market and the establishment of commercial consolidators.
The concept of a DB superfund is technically complex, and there are a wide range of potential solutions with differing features that could be grouped under this umbrella. The government has stated that it does not want to be overly prescriptive, to avoid stifling innovation and new entrants to the market. But it is equally important to allow this market to develop and innovate before deciding that there are gaps that need to be filled, and to ascertain the best structure for a public consolidator to achieve this.
The experience of SPP members is that small DB schemes can readily access the bulk annuity market if they have properly prepared for a transaction. There may not be as much competition, and smaller schemes often need to focus their attentions on a single insurer, but this can still lead to a suitable transaction at a reasonable cost. There is also no reason why a DB superfund should not be available for smaller schemes, once this market has been allowed to develop.
It seems that the main category of scheme for whom insurance company buyouts and DB superfunds will be unavailable are those in a weaker financial position, or those that are poorly managed with unresolved problems relating to their data and documentation. A public consolidator could provide a solution in such cases, but who would meet the cost, and what incentive would there then be for schemes to address their funding and governance?
Steve Hitchiner is president of the Society of Pension Professionals