David Brooks, of pensions consultancy Broadstone, told FTAdviser that the plan, expected to be included in an upcoming government green paper on the future of the DB system, was misguided and unnecessary.
He said it was based on the mistaken belief that "small" equated to "bad" and the view that large alternative assets such as infrastructure were a desirable investment for a DB scheme.
Mr Brooks insisted that infrastructure in particular was ill-fitted to DB schemes because it was completely uncorrelated to liabilities. He described the asset class as "pie in the sky".
The Work and Pensions select committee promoted the creation of an aggregator fund in the final report of its DB inquiry, published in December.
The aggregator fund, the committee said, would be a full-benefits version of the current Pension Protection Fund, also managed by the PPF, and provide the sponsors of smaller schemes with an alternative to an annuity buy-out.
The idea received the provisional backing of current pensions minister Richard Harrington during the consultation period, as well as that of his two predecessors Ros Altmann and Steve Webb.
The PPF's Alan Rubenstein confirmed the PPF would take up the task if asked.
Mr Harrington told the committee: "There must be some kind of product or system that involves a non-PPF PPF that is at full level, not at a discounted level, where small sub-scale funds would be quite happy to put their members’ money and benefits into, knowing that they are going to have a chance of getting better returns."
At a recent conference hosted by the Trades Union Congress, Mr Harrington reaffirmed his support of consolidation, saying it would give DB schemes the scale to invest in large, valuable, but relatively illiquid alternative assets such as infrastructure.
"If you’re a £20m scheme, you couldn’t put £10m into [a single asset]. But if you’ve got £10bn under management, you certainly could consider the sort of [investment],” he said.
But Mr Brooks dismissed this idea. He said that while infrastructure might be good for DC schemes, for DB it was a “terrible idea”.
"When your liabilities move, which they will, it [infrastructure] has no correlation with any of those things. You want to be as correlated as you can because then you’re de-risked. It’s adding a risk element that this is not going to pay out when you need it to pay out."
He also said that an aggregator fund would "destroy" the private sector annuity buy-out market - that is, the market for private insurers to take on the liabilities of a DB scheme through a bulk annuity policy.
“Say you’re in a world where it [the aggregator fund] exists and it’s cheaper than buy-out to go into this aggregator fund. That destroys the buy-out market. Why would anyone ever go into buyout again?"
Among his other objections were: that it would encourage schemes to underperform knowing they had a back-up; that it could shift the risk onto the taxpayer; and that it was not a "very Tory" policy because it would interfere with free markets.
He said that, while the idea would certainly feature in the green paper, he doubted it would ever become a reality. But he added that on this he was in disagreement with others experts, even within his own firm.
Consolidation is one of several issues the Department for Work and Pensions will consult on in its green paper.
The purpose of the paper is to find ways to contain the current under-funding crisis facing the UK DB schemes.
Other options include allowing schemes to switch annual indexation from the retail price index to the consumer price index; changing the way liabilities are calculated; and giving The Pensions Regulator more powers.
While the green paper is expected to be released imminently, a spokeperson for DWP was unable to provide a precise date.
Responding to Mr Brooks' criticisms of the aggregator fund, the spokesperson said DWP would "look forward to hearing the views and suggestions from the industry on the topic".
james.fernyhough@ft.com
