The role of superfunds in the future of DB

By Joe Dabrowski, Head of Governance & Investment at the PLSA.

For the 11 million savers relying on Defined Benefit (DB) pensions for their retirement there has been some much needed good news in recent months. 

Scheme deficits have continued to fall, there has been a small increase in interest rates, and the cold-calling ban is getting closer. The Pension Protection Fund (PPF) has even begun to talk about when, sometime in the future, it may be able to distribute its surplus. 

For the first time in a long while we can see a brighter future ahead for DB and the path we need to take. However, I think we all know we’re not there yet. 

The Department for Work and Pensions’ (DWP) White Paper, published in March this year, recognised the sector’s challenges, and the importance of both strengthening protections for schemes as well as finding ways to ensure as many savers as possible receive their benefits in full. 

It was those principles that also saw the PLSA set up its own DB Taskforce in March 2016 to review the difficulties facing DB schemes and to propose a broad set of possible solutions. We were therefore pleased the White Paper included a number of the Taskforce’s recommendations, including the potential benefits of scheme consolidation. 

There is a growing body of evidence that consolidation could provide benefits of scale for schemes, and the consolidation option that has undoubtedly seen the most discussion is the creation of superfunds. Superfunds are schemes which offer to absorb the assets and liabilities of schemes and manage them for the long-term, and we have already seen a number of providers emerge. 

In our view, with the right regulatory framework, superfunds could use their scale and expertise to provide a more secure future for schemes that won’t be in a position now or in the future to buy-out. This should ensure more members receive their full benefits, significantly reduce the risk of claims on the PPF, and create wider benefits for employers, the regulator, and the economy. 

DWP has now committed to consulting on the details of how superfunds could work later in the year. It will be vital, given the likely timetable for legislation, that the consultation sets clear expectations to protect savers now and in the future. For example, we’ll want DWP to set out rules for a strong authorisation regime, along the lines of the DC master trust regime, to ensure superfunds are run and governed correctly. 

The path to the brighter future will not be without twists and turns, but none of us can forget that DB schemes provide valuable benefits to millions of people and these savers deserve to feel confident in the security of their scheme. We share the Government’s view that a range of measures is needed to strengthen the framework of DB schemes, and it is our belief that consolidation and superfunds have a key role to play in securing member benefits.