PLSA fleshes out radical superfund proposal

The Pensions and Lifetime Association’s DB taskforce has fleshed out a radical plan for a superfund to pool the assets of thousands of DB schemes into a single industry-wide scheme.

Publishing its final report today, the DB taskforce has proposed a superfund that would be allowed to simplify and harmonise benefits of schemes entering it, create economies of scale and reduce costs.

Other proposals in the report include a new Chair’s statement for DB scheme trustees that requires them to demonstrate they are operating in line with best practice in areas such as governance, investment performance and cost transparency, and new powers to simplify benefit structures.

A survey of sponsoring employers carried out by the PLSA has found 65 per cent support the principle of consolidation, with 72 per cent supporting with shared administration, 66 per cent backing shared external advisers, 64 per cent supporting shared governance and 54 per cent supporting pooling assets under one asset manager.

The proposed superfund would be an occupational pension scheme authorised and supervised by The Pensions Regulator and eligible for the Pension Protection Fund. Trustees and employers would need to jointly agree to transfer their scheme, including all assets and liabilities, into the superfund, with employers paying a fee upon entry to reduce scheme underfunding.

Superfunds would aim to pay members the full value of their benefits in more than 90 per cent of scenarios. The transfer would only take place if trustees has assessed the new arrangements and agreed that they are beneficial to members says the PLSA.

Payments would be simplified to a common structure as entering schemes would have a variety of different scheme designs that would increase complexity and administrative costs. As a result of the benefit simplification members could receive an uplift in their headline benefits, says the PLSA.

The PLSA says simplification of benefits should be promoted, whether the superfund goes ahead or not, because the UK’s 6,000 DB schemes manage tens of thousands of different benefit structures, making them costly to administer, confusing to members and a barrier to improving efficiency.
PLSA DB taskforce chair Ashok Gupta: “There is a real possibility that without change we will see more high profile company failures such as BHS or Tata Steel. It is vital that action is taken to address covenant risk, underfunding and the current lack of scale in the majority of schemes.

“Our proposals have the potential to transform the industry – helping to ensure more members get their full benefits, reducing sector inefficiency, addressing the issue of stressed schemes and enabling sponsors to concentrate on growing their businesses. The industry and government need to grasp this opportunity and tackle serious flaws that threaten the security of people’s retirement.”

PLSA director of external affairs, pensions and lifetime savings Graham Vidler says: “We asked the taskforce to be bold and challenge commonly-held perceptions. Today’s report is proof that they have done just that. The UK’s 6,000 DB schemes face 6,000 different challenges and the taskforce’s proposals create new options to tackle each of them.

“Consolidation can benefit a variety of schemes and their members but there are some key challenges for those who want to pursue this option. The new DB chair’s statement and the ability to consider simplifying benefit structures have the potential to help these schemes by removing some of these barriers and allowing them take proactive steps to manage their deficits.

“The taskforce’s analysis of a potential superfund framework moves forward significantly the case for considering how employers can be enabled to swap covenants for cash. We call on industry and the Government to work with us to further develop and test this framework.”

Royal London director of policy Steve Webb says: “This is a really valuable report whose recommendations deserve to be taken very seriously by policy makers. The report highlights the fact that millions of savers have only a fifty-fifty chance of having their pensions paid in full by their company pension scheme. High profile cases such as BHS and Tata Steel are only the tip of the iceberg and the government needs to be more proactive to reduce the risk of more scheme members not getting their full pensions. If schemes can be consolidated in a way that provides better value for money, reduced pressure on employers and an increased chance of pensions being paid, this could be a real step forward.”