DB consolidator market shrinks before it starts
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Defined benefit consolidator the Pension Superfund is being ‘mothballed’, having not received regulatory approval to date. The withdrawal of a market participant just as the Treasury has thrown its weight behind superfunds could put pressure on the Department for Work and Pensions and the Pensions Regulator to relax proposed rules.
Superfund co-founder Edi Truell, who in August denied that the fund was closing, was reported by the Financial Times on Thursday as saying that he was ‘mothballing’ his venture. mallowstreet understands the Superfund is waiting for the Pensions Regulator to revisit its guidance.
Earlier this month, mallowstreet reported that one of the Superfund’s board members, Margaret Snowdon, had stood down citing her experience of trying to receive regulatory approval for the vehicle. The fund’s former chief executive Michael Clark stopped working for the organisation in February.
Use of surplus in focus
On 6 September, the other co-founder of the Pension Superfund, Luke Webster, told MPs that without clearer regulations about the use of surplus, the venture was unlikely to proceed.
"Without more clarity we probably will not be proceeding with our proposition for the foreseeable future,” he said, calling the regulator’s guidance update “too little, too late from our perspective”.
Webster argued the term ‘profit extraction’, used by government and regulators, cast a negative light on the superfunds model. Any pensions business – insurers offering buyout included – needed profit to run successfully, he said.
"There is always profit in these kinds of things and that is not bad. That is how you pull capital into the system to create security,” he said.
In the unsectionalised superfunds model, profit would come from surplus generation, something he said is still difficult under the current framework.
He also called the proposed ‘gateway’ mechanism - whereby schemes over a certain level of funding would be prohibited from using a DB consolidator and had to look to an insurer for transferring liabilities - “a very uncompetitive feature” of the proposed superfunds legislation.
Will the ‘gateway test’ protect members or insurers?
Superfunds laid the blame for the delay in getting superfunds legislation across the line at the door of the Association of British Insurers, whose director of policy for long-term savings and protection, Yvonne Braun, had also been giving evidence that day.
Adam Saron, founder and former chief executive of stage-to-buyout consolidator Clara-Pensions, suggested during the committee hearing that the ABI had lobbied the Treasury to stop superfunds getting the green light from the Department for Work and Pensions, and that the Treasury had changed its mind only recently.
"Luke was very polite when he said there were differences in government following the 2018 White Paper; I will be direct. The ABI—I would say this to Yvonne [Braun]’s face if she was still sitting here—were very resistant to the idea of superfunds, and that was reflected in the Treasury’s view. That was incredibly unhelpful,” Saron said.
The long absence of a response to the superfunds consultation from 2018 probably cost superfunds three years in time, as well as millions of pounds, he claimed, and meant the Pensions Regulator had to produce guidance without knowing what any eventual legislation would look like.
Saron also criticised the gateway tests proposed by DWP: “I have consistently been against them, because they are not a protection for members—that is not true. They are a protection for insurers, and I do not think the insurers need protection. They are going to do enough business this year and will have plenty left over for the next decade to come.”
The gateway removes decision power from trustees, Saron argued, saying it equates to regulators telling trustees that they must not even think about superfunds if their funding is higher than a certain level.
"I think that is wrong. The real gateway for pension schemes is the trustees. It is their job to decide what is the best way of delivering the benefits under the scheme,” he added.
ABI: ‘It is questionable whether superfunds are still needed’
Earlier that day, Braun had been clear that she did not consider superfunds a useful addition to the market.
“Given all the funding improvements that we talked about earlier, it is questionable whether superfunds are still needed,” she said.
If the government is going ahead with them, it should “make sure that there is a very, very clear distinction between what superfunds can offer and what buyout insurers can offer”, she noted, saying much of this was about how the gateway test was constructed.
Braun emphasised that there were still many unanswered questions about the superfunds regime, including around TPR powers for enforcement, the legal definition of superfunds, the relevant tax regime and the gateway test.
While the government may now be looking to superfunds for productive investment, she also said it was not clear what superfunds will invest in.
An ABI spokesperson said the companies seeking to run superfunds are sophisticated financial services organisations and need to be regulated as such to ensure they work in the best interests of savers whose financial security they look after.
“That is why we support the government’s commitment to primary legislation and a robust regulatory regime for their authorisation, supervision, and enforcement. We make no apologies for raising these concerns during earlier stages of the process and consistently since 2018,” the spokesperson added.
The government, in the meantime, has proposed setting up its own DB consolidator, run by the Pension Protection Fund. The pensions industry has decried the proposal as anticompetitive and said it would move DB risk onto taxpayers.
What does this development mean for schemes that cannot afford to buy out with an insurer?
