The Pension and Lifetime Savings Association (PLSA) has put forward recommendations on how defined benefit (DB) schemes could best consolidate into superfunds as a way to limit risk on scheme members.
The national association’s report The Case for Consolidation suggested that shared services, asset pooling, single governance, or a full merger are all options that DB trustees should consider when looking to set up a superfund.
The idea for a superfund to provide small DB schemes with scale was first put forward last month as part of the Department for Work and Pensions’ green paper on the future of DB schemes.
PLSA’s Defined Benefit taskforce has suggested that by combining administrative functions across schemes then firms can save around £600m of costs per year through economies of scale, especially for small and medium schemes.
Various schemes could pool assets together to be managed centrally, while individual schemes could still look after governance, administration, back office functions and most advisory services while still savings around £250m per year.
If various schemes were to consolidate assets into a single pool while also joining forces on governance, administration and back office functions, then firms could save £1.2bn annually.
However, a full merger into a super fund would provide the greatest risk protection to schemes, according to the PLSA. The superfund would essentially discharge employers and trustees from their DB responsibilities and replace existing schemes, as well as make all future benefit payments.
PLSA estimated that conversion into a superfund would cut the risk of schemes failing from around 65 per cent to less than 10 per cent.
Ashok Gupta, chair of the Defined Benefit Taskforce, said that the assumption that DB scheme members are guaranteed to receive full benefits is false, and in reality there is only a 50 per cent chance that they will receive their DB benefits as promised.
He said that superfunds offer DB members the best chance of receiving their full pension, as £the biggest gains lie in the merger of schemes”.
“Members get a better chance of more pension benefits being paid. Employers get a lower cost alternative to a buy-out. The regulator gets a sector with better managed risks. The economy benefits from improved investment by superfunds and employers are freed from onerous DB burdens."
Francis Klonowski, principle at Klonowski & Co, called the idea of a superfund a “cop out” and suggested that savers could be better off taking their money out of the DB scheme and transferring to a DC scheme because “at least they know where their money is”.
“I personally don’t like it. If I was a member I’d wonder how they know which part is mine,” Mr Klonowski said.
