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Protecting your pensions

Why there are serious concerns about Government proposals to encourage so called ‘superfunds’


The Government is proposing to create a new form of pension regulation to encourage the set-up of so-called pension ‘superfunds’. The ABI has responded to the Government raising serious concerns over the policy. This explainer, accompanying our submission to the DWP, sets out why we think these proposals risk putting employees into a game of retirement roulette.

What is a superfund?

So called superfunds are commercial companies set up to buy out defined benefit pension schemes run by employers when they no longer want them on their books.

What do the proposed new rules do?

The new rules are meant to help employers offload pension liabilities cheaply to newly set up commercial consolidators known as ‘superfunds’. Both superfunds and insurers operate to make a profit, but the DWP are proposing to allow lighter regulation for superfunds so they can buy out schemes more cheaply.

This means pensions transferred into a superfund are much less likely to be paid out in full, with employers becoming able to cherry-pick what level of security for members they choose to pay for.

Don’t insurers already do this?

Yes, some insurers already do this job but regulations require that insurers offer near certainty that pensions will be paid out in full. For example insurers are required to hold more capital back in reserve to cover loss making investments than a superfund does. So even if the value of the stock market dropped by a third, insurers would be able to pay out all their promises.

This insurance buy out market is growing – last year saw £30bn worth of pensions bought by insurers from employers.

If this is the offer why is it even being considered when insurers offer near certainty?

Initially DWP wanted to fill the gap between schemes falling into the lifeboat and insurance buy-out, and in particular find a solution for the worst off pension schemes that had the lowest chance of being paid out by their employer. But the Superfunds have since said they aren’t interested in buying these schemes and want to target better funded schemes. The current proposals will do nothing for those in the most poorly funded pension schemes.

What regulation will apply?

DWP are proposing superfunds are regulated by the Pensions Regulator. This would make superfunds - which are commercial entities set up to make a profit – the only complex, for profit financial institution not regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Who else is worried?

The PRA have raised significant concerns, saying that superfunds are ‘very similar to insurance companies’, and that the proposals for a different regulatory regime may have ‘unintended consequences’. They too believe that the Government’s proposals need more work, to ensure that they ‘keep pensions secure’.

What does this mean for people’s pensions then?

Right now there is a binary choice for solvent employers between keeping a scheme on their books and transferring it to an insurer. This is the gold standard option that offers certainty for employees and ensures employers take their responsibilities seriously. By creating superfunds the bar for buy-out is lowered and this creates a huge incentive for employers who would otherwise have transferred their pension liabilities to an insurer to now go for the cheaper option. The employer and the profit making consolidators all win from this, but the employees lose out.

What are the ABI proposing?

There needs to be an urgent and fundamental rethink of the policy, involving the PRA, the FCA and other financial specialists. But if DWP are determined to go ahead at this point with setting up an alternative framework it needs to make sure it puts pensioners ahead of profits.

That means:

  • Giving PRA and FCA the responsibility for regulating so-called superfunds as they have the experience of dealing with complex financial institutions.
  • Tightening the rules to prevent employers offloading schemes on the cheap when they could afford to buy the extra protection an insurer gives.
  • Stronger requirements for superfunds and investors to hold capital back to guarantee payments of pensions.
  • Tougher oversight and accountability of the individuals running superfunds and a robust risk management framework which includes regular reporting and detailed disclosure requirements along with close and continuous supervision.