Defined Benefit  

Pension lifeboat wants tests for consolidating schemes

Pension lifeboat wants tests for consolidating schemes

The Pension Protection Fund (PPF) is suggesting that defined benefit (DB) schemes which want to move into a superfund should undergo an assessment, in a bid to guarantee member protection.

The pensions lifeboat argued, in a written submission to the Work & Pension select committee inquiry on the DB white paper, that the future regulatory regime on consolidation will need to ensure that scheme trustees "take appropriate expert advice" before moving into one of these superfunds.

The PPF also stressed the new rules will need to "provide a mechanism to intervene and prevent transactions if that is necessary to protect members".

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In its white paper, the government revealed plans to promote consolidation in the final salary pension market, in which two thirds of the 5,600 schemes have funding shortfalls.

Following the publication of the document Alan Rubenstein, former chief executive of the PPF, was the first to act by launching the Pension Superfund, which will accept bulk transfers from final salary plans and consolidate them into one occupational pension scheme.

The new scheme will only take in pension funds that are fully funded.

second consolidator, Clara, is being created and is expected to come to market in the next few months.

The goal of the pensions lifeboat is to ensure that any scheme transferring to a superfund "is actually increasing the level of security of its members".

A spokesman for the PPF said: "While we recognise that some commercial propositions are expressly targeting buying out schemes' liabilities once they achieve a sufficient funding level, our concern is to mitigate the risk to scheme members through situations where a scheme transfers to a superfund (which doesn't target buy-out) when it could have gone on with their employer to secure buy-out."

In buy-outs, an insurance policy is issued to each pension scheme member individually which enables the pension scheme to wind up.

However, it is considered to have a high price and some schemes aren't able to afford it.

A spokesman for the PPF said: "The government has been clear that superfunds will not be required to meet the same funding standards as insurers. 

"To state the obvious this means that scheme members will have a lower level of certainty that their benefits will be paid in full than if their scheme had secured their benefits with an insurer. Accepting this greater degree of risk is essential to make the superfund model work."

Due to this, the pensions lifeboat, which will need to create a special levy regime for consolidators, is proposing a set of wind-up triggers, to ensure these schemes are fit to operate in the market.

These consolidators should be submitted to checks on a superfunds' funding level, investment strategy, and profit withdrawal mechanisms.

In its analysis of schemes without a substantive employer, the PPF defined a model for these plans to be able to pay benefits in full.

According to this model, the superfund would need to have a level of funding in excess of 100 per cent on a section 179 basis - the valuation measure for PPF level benefits.