The Pension Superfund, which is being created by the former chief executive of the UK pensions lifeboat, won’t be a solution for distressed defined benefit (DB) schemes.
Alan Rubenstein, who was until January this year the head of the Pension Protection Fund (PPF), told FTAdviser that pension schemes will have to be fully funded to transfer into the new superfund.
He teamed up with City financier Edi Truell's Disruptive Capital and private equity investor Warburg Pincus to launch the new scheme, which will accept bulk transfers from defined benefit (DB) plans and consolidate them into one occupational pension scheme, and has already lined up an initial £500m of capital.
But in the wake of a series of high-profile pension scheme collapses, Mr Rubenstein said pensions that are in an extremely distressed position will not be part of the new superfund's target market.
“We need to make sure that our funding basis is sufficiently strong to offer a high level of security.
“The trustees of the scheme that is transferring in want to make sure there's no diminution of their covenant, equally the trustees of the superfund will not want to allow schemes to come in that are more weakly funded, because that would reduce their covenant.”
For pension schemes that are in a funding deficit, the employers can pay the difference to the get the funding to 100 per cent, Mr Rubenstein explained.
He said: “Rather than an employer having a recovery plan that gets them from a current level to 100 per cent in ten years, for example, they would be willing to pay now the difference to get it to 105 per cent funded on the superfund basis and complete the transfer.”
The superfund will also ask the employer for a premium, which together with the superfund investors capital, “represents the pool of security that would secure the members' benefits,” he added.
Mr Rubenstein said the superfund will appeal to employers or schemes where the funding is reasonably good, but insurance buy-out is just not something that they could contemplate.
"Where, given the size of the scheme relative to the size of the employer, the employer is keen to effectively transfer the liabilities to somebody else and can afford to do that.”
The announcement of the creation of the superfund follows the government’s publication of its DB white paper, where it revealed plans to promote consolidation in the defined benefit pension market, in which two thirds of the 5,600 schemes have funding shortfalls.
Distressed schemes such as BHS and Carillion needed to be rescued by interventions of The Pensions Regulator, which some of them ending in the pensions lifeboat as the last resort to protect members’ benefits.
Mr Rubenstein guaranteed that members will have exactly the same benefits as if they were in their original scheme, with added advantages.
He said: “On the security side, you are swapping a covenant and potentially a deficit for a fund which will be protected by strong funding standards, and by an additional layer of capital provided by investors and the entry premium.
“If the fund is successful, one of the things that we will be doing is aligning the interests of members and investors - if investors get a distribution there will also be a distribution by way of bonus pensions to members as well.
“Some of that return has to go back to members, and the best way of doing that, it seems to us, it’s to provide a pension top-up.”
Nathan Long, senior pensions analyst at Hargreaves Lansdown, argued that “currently the number of fully funded DB schemes are few and far between, but that does not mean that things cannot change quite quickly”.
He said: “If gilt yields improve we would expect to see liabilities fall and funding positions improve.
"Employers may then decide to accelerate deficit reduction payments in order to be accepted into the superfund. Reducing administration costs on monies that are largely managed for past employees could be very attractive for certain employers.”
maria.espadinha@ft.com
