Regulator raises concerns over defined benefit superfund

Last month the government proposed creating a defined benefit "superfund" to provide small defined benefit schemes with scale.

However the green paper on the future of DB schemes launched by the Department for Work & Pensions stated such a superfund should probably be a voluntary initiative, and should not be run directly by the government.

Speaking at the Pensions and Lifetime Savings Association investment conference in Edinburgh this morning (9 March), The Pensions Regulator chief executive Lesley Titcomb questioned the premise that mass consolidation of small defined benefit documents was even necessary.

Also speaking at the event, PLSA DB Tasforce chair Ashton Gupta insisted the creation of multiple superfunds would address what he called a "systemic failing" in the defined benefit sector.

But while Ms Titcomb said it was "good to see some concrete ideas emerging", she questioned the taskforce's premise.

"I'm not sure I share the view the DB sector is systemically failing," she said, claiming that only a small minority of schemes were "stressed", and that the majority would meet their obligations to members.

It was these stressed schemes that needed the regulator's attention, she claimed.

"I'm not yet clear in my mind whether [superfunds] would help the most stressed schemes," she said.

Currently the only schemes TPR regulates that do not have a sponsoring employer are defined contribution master trusts. But Ms Titcomb said these were "very different" from the proposed DB superfunds. 

"I'm not saying wouldn't or couldn't [regulated superfunds]. But it would be a very different proposition," she said.

Civil servants can come up with all sorts of models, but it's about what will work in the real world.Charlotte Clark

She said the difficulty of designing a "prudentially robust structure" for such schemes explained why consolidation had not already taken place among private sector schemes.

Mr Titcomb added that schemes wanting to consolidate would face "huge communication challenges" with their members.

Representatives from the Department for Work & Pensions and the Pension Protection Fund, who shared the stage with Ms Titcomb, also aired their misgivings about the proposal. 

The Pension Protection Fund's general counsel David Taylor rejected the idea that the system was failing, saying PPF modelling suggested the probability the lifeboat fund would succeed stood at 90 per cent.

"We don't see the case for a dramatic change to the system, save for making it easier to enforce existing regulations," he said.

Charlotte Clark, the DWP’s director of private pensions and stewardship, was more positive about the superfunds idea.

Ms Clarke said there was political will to enable consolidation "if the benefits are really clear".

She said there was a "tremendous desire for us to look at consolidation", but stressed the first question to answer was why it was not already happening. 

She also stressed the need for practicality.

"Civil servants can come up with all sorts of models, but it's about what will work in the real world," she said.

Ms Clark acknowledged criticisms that the government's green paper was "a little too green", but said: "It's the beginning of a really good debate."

Mr Gupta, meanwhile, called for bold thinking.

"There's a mindset within the sector ... that consolidation is really difficult," he said, adding that a "catalyst" was needed to change that mindset.

james.fernyhough@ft.com