On 7 December 2018 the Department for Work and Pensions (DWP) published a consultation on the consolidation of defined benefit pension schemes inviting views on a new legislative framework for ‘superfund’ schemes.
Today we have published our response to the consultation. We recognise that well run superfunds have the potential to provide more security for some schemes, and have a helpful part to play in the defined benefit universe. However, unconstrained they have the potential to pose significant risks to the PPF and to our members, levy payers and members of the schemes we protect.
We believe that any superfund allowed to operate must provide a high level of confidence that it will pay benefits to its members in full. As a consequence, it would also need to provide a high level of confidence it will not need to make a claim on the PPF.
A regulatory framework for superfunds
We welcome the Government’s intention to establish an appropriate regulatory framework for commercial consolidators.
Financially robust with strong governance
We have considered how best to protect superfund members and levy payers from the impact of superfund failure. In order to achieve this we believe it is critical to:
- establish a funding-based member protection trigger
- have a second ‘wind-up’ trigger to require a superfund to stop operating when the risk of a PPF claim becomes too high
- make sure that capital held is adequate given the level of risk the superfund runs
- set legal and governance arrangements so the measures listed above are effective in practice, there’s no scope for inappropriate exploitation of the scheme and there are adequate sanctions if rules are broken.
In addition to controls on financial strength, we support the Government’s plans to set minimum standards for governance. This includes making sure trustees and others involved in running superfunds pass a ‘fit and proper’ test.
Security for members
Moving to a consolidator would be irreversible, so in our view it’s only appropriate for a transfer to take place if it offers a significant increase in security for scheme members.
We therefore believe the Government’s proposals for a gateway are essential and that this should be designed to ensure any transfer substantially increases the level of security for scheme members.
Our levy methodology for superfunds
We’ve published a levy methodology for superfunds, or commercial consolidators, for the levy year 2019/20. This is our first iteration of a levy rule for consolidators. As the new regulatory regime takes shape and as the market develops we expect to adapt and change our approach.
Our goal will remain the same: to set a robust, transparent methodology that delivers a risk reflective levy.