The first commercial consolidator of UK defined benefit (DB) occupational pension schemes has launched, with the former chief executive of the Pension Protection Fund (PPF) at its helm. 

The Pension SuperFund has been set up to absorb bulk transfers of UK DB pension assets and liabilities and consolidate them into one occupational pension scheme.

It has lined up £500m (€571m) of capital to underpin these commitments and establish the vehicle, largely coming from private equity firms Warburg Pincus and Disruptive Capital as initial investors. Investors will share in any surplus achieved by the superfund after benefits are paid.

The latter is the family office of Edi Truell, a long-term supporter of scheme consolidation through previous roles as co-founder of Pension Insurance Corporation and chair of the London Pension Fund Authority.

In a statement, The Pension SuperFund said it expected to grow to £20bn “and beyond” over time.

Alan Rubenstein, who left PPF at the start of this year after early nine years in charge, is to lead the consolidator fund as CEO. He told IPE there was an estimated £250bn market for the fund’s services today, and that this would probably double over the next five years as schemes continued to close to future accrual.

“In that context £20bn seems well achievable,” he said.

Rubenstein is joined at the superfund by Marc Hommel, the former global head of pensions advisory at PwC, and Luke Webster, chief investment officer at the Greater London Authority and former chief financial risk officer at the London Pension Fund Authority. Webster is also partner and chief financial officer at Disruptive Capital.

Rubenstein said The Pension SuperFund was already in discussions with several pension funds, sponsors and advisers. As to when it would absorb a first scheme, he told IPE that time would tell.

”These things clearly do take time,” he said. “We’ll have to wait and see, but we have been really cheered by the reception that we’ve received so it does look like we have good wind behind us.”

Blazing a trail

The launch of the consolidating fund is a direct response to challenges from both the UK government and the pensions industry to find ways to ensure the sustainability of DB schemes and many of their sponsors by improving governance and efficiency.

Last year, a taskforce set up by the Pensions and Lifetime Savings Association (PLSA) advocated “superfunds” as an alternative funding option for DB schemes with weak sponsors.

In a wide-ranging white paper published on Monday, the UK government supported the PLSA’s work and promised to consult on changes to legislation to allow commercial consolidators to operate.

“Some employers find that they are constrained from focusing effectively on their core business because of the need to support a closed legacy pension scheme, the liabilities of which may be volatile and unpredictable,” the government said.

“If an employer can afford entry they could exchange their covenant support through transfer to a consolidator and know exactly how much they had to pay, making planning for their future business easier. If at the same time members’ benefits were likely to be more secure, then this would create a more beneficial situation for all parties.”

The white paper indicated the consultation on a legislative framework and authorisation regime was likely to take place towards the end of this year.

However, Rubenstein said the superfund saw no reason to wait until the consultation took place and legislation was passed. 

”We want to make a start now because we think there is a real demand for it and a real need,” he said.

He said The Pension SuperFund welcomed the encouragement given to consolidation in the government’s white paper and that it was right that The Pensions Regulator (TPR) made sure there was sufficient protection for members. Rubenstein has a long history of working closely with the regulator during his tenure at the PPF.

“We would hope to work with them and help in defining those rules, but we believe that fundamentally it is possible to do consolidation under the existing framework,” he said.

The superfund would seek approval – known as “voluntary clearance” – from TPR every time it absorbed a scheme, according to Rubenstein. 

No benefit changes 

A scheme’s transfer to the superfund would not trigger changes to benefits, according to Rubenstein. He said that The Pensions SuperFund did not think it necessary to have legislation to simplify or standardise benefits. This was in contrast to the PLSA’s findings.

“We think it is possible to offer all existing scheme members the same benefits as they’re currently getting but to deliver those with greater certainty,” he said. “We don’t need to do actuarial equivalence, we don’t need to do bulk reductions.”

In the statement announcing its launch, The Pension SuperFund said the scale provided by consolidation would enable it to achieve higher investment returns, stronger risk management and lower costs.

“This, underpinned by the capital provided by its investors, will enable The Pension SuperFund to offer higher levels of security for meeting future pension promises and better outcomes for pension scheme members, trustees and sponsoring employers,” it said.

Rubenstein declined to comment further on the criteria the consolidator fund would use when assessing schemes for transferral, beyond that they had been decided and would relate to size, covenant “before and after”, and funding levels.

What the government says on consolidation

Offering industry the opportunity to innovate and create a number of different models with a variety of target markets could, in future, offer a more affordable way of risk transfer.

However, it is important that this is done in a safe way, with clear parameters for vehicles to operate within and to provide members with reassurance that funds are meeting a set of clearly defined standards.

Despite the work already done within the industry on commercial consolidation vehicles, there is much more to do to develop this policy to a point where it could be successfully delivered.

When the current DB legislative framework was designed, it was always intended that an employer would stand behind the scheme, or that the scheme would buy out with an insurance company subject to strict funding and capital requirements.

We therefore need to ensure that exchanging sponsor covenant and moving into a commercial consolidator improves the expected outcomes for members in order to realise the benefits that consolidation could bring.

We are therefore developing proposals for a legislative framework and authorisation regime to enable consolidation in which an employer no longer sponsors their DB pension scheme.

There is a delicate balance to be struck. If the legislative framework is too restrictive, then the consolidator vehicles may not be commercially viable but if the vehicle is under-protective of members, then the risks to members’ benefits will be unacceptable.

We have therefore identified a number of areas that will need to be considered, which will be subject to further consultation this year.

 

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