The government should set stricter conditions on when defined benefit (DB) consolidators can extract profits, XPS Pensions Group has stated.
In its response to the Department for Work and Pensions (DWP) consultation on this matter, which was launched in December and closes today (February 1), the consultancy firm stated consolidators should only repay their investors once members’ benefits are secured.
This was to alleviate concerns around competition and risk posed by the new vehicles.
Wayne Segers, principal at XPS Pensions Group, said: "Superfund investors should only be allowed to take out money when members’ benefits are settled, ideally by transferring to an insurer.
"This is important to prevent superfunds becoming a systemic risk. It also addresses valid market concerns about unfair competition with insurers."
According to the DWP consultation document, DB schemes won’t be allowed to transfer to a consolidator if an insurance buy-out is possible.
In these type of transactions, an insurance policy is issued to each pension scheme member individually, which enables the pension scheme to wind up.
The DWP believes this "provides the greatest certainty of benefits being paid when they fall due".
Mr Segers said a recent poll of delegates representing pension schemes at XPS’s Northern conference showed 65 per cent did not think superfunds would improve outcomes for members.
"Our proposals would go some way to addressing these concerns," he said.
The first consolidators emerged after a DB white paper published last March, in which the government revealed plans to promote consolidation in the DB pension market, in which two thirds of the 5,600 schemes have funding shortfalls.
The Pension Superfund and Clara Pensions both have structures in place which guarantee that investors will only profit after benefits are secured.
The Pension Superfund will only accept schemes funded on a 105 per cent basis, and the investors’ money will be used to bring the scheme entrants' funding levels to 115 per cent. The extra 10 per cent is allocated to a special buffer.
Any improvement in the scheme’s funding levels will be divided each year between this buffer, which will receive two thirds of the surplus, and a member trust, which will get the other third.
If at the end of the year, after allocating this surplus, the superfund level is still above 115 per cent, the investors will get a return.
Clara Pensions’ structure is simpler - no capital or profit can be returned to capital providers until every member in a section has had their full benefit secured in the insured market.