Insurer warns of ‘terrifying’ pension shake-up

One of the UK’s biggest life insurers has called new government pension proposals “terrifying” and warned that they could leave scheme members with less protection than they have now.

Tracy Blackwell, chief executive of Pension Insurance Corporation, told the Financial Times that the proposed rules for so-called pension superfunds “will not give enough protection to policyholders. It is not clear what capital the new funds will have to hold”.

Superfunds are expected to offer a cheaper way for companies to rid themselves of unwanted pension schemes than the current option, which entails passing them on to an insurer via a buyout.

Insurers offering buyouts have to comply with the Solvency II capital rules but the deals can be too expensive for many companies to consider. The superfunds, which would not have to comply with Solvency II, would be a new form of competition for insurers such as PIC.

However there are worries that, without enough capital, some superfunds could struggle to pay the pensions that have been promised to scheme members. In that case the schemes would be passed on to the Pension Protection Fund, the industry lifeboat fund, and members’ benefits would be cut.

The government’s proposals, which were released in December, are open for consultation until the start of February.

One of the superfunds hoping to take advantage of the new rules is Clara Pensions. Adam Saron, its chief executive, said that the new regime would help schemes attached to weak companies.

“We’re not promising certainty. It’s about improving the likelihood of members getting their pensions paid. It is offering schemes another option,” he said.

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The superfunds will be backed by outside capital. Clara, for example, has up to £500m from US private equity group TPG. However, they will be supervised by the Pensions Regulator, which oversees pension funds, rather than the authorities that regulate insurance companies.

Ms Blackwell said: “Our fundamental objection . . . is that it is wrong for a for-profit financial institution not to be regulated as a for-profit financial institution. Why are people being allowed to set up a for-profit financial institution outside the regulation of the Financial Conduct Authority and the Prudential Regulation Authority?”

She also argued that there was “enormous” potential for moral hazard as companies would be tempted to put their schemes into superfunds rather than providing the extra money that would be needed to get them all the way to a buyout with an insurance company.

“Member protection is our top priority and our consultation sets out rigorous standards that any consolidator would have to pass in order to be authorised,” said a spokesperson for the Department for Work and Pensions. “Under our proposals members would benefit from the protection of an increase in their scheme’s funding and the backing of a capital buffer.”

“Our consultation is ongoing and we will consider all responses once it has concluded, before setting out our next steps in due course,” the spokesperson added.

Mr Saron said that he was not targeting schemes that could reach a buyout, but was instead aiming to provide a better outcome for schemes that were too weak to do a buyout.

“We view the buyout market as the gold standard. If a scheme could buyout today they should do it . . .[Superfunds] are an option for the majority of schemes for which a buyout is not an option today.”

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The development of superfunds could spur a wave of disputes between pension fund trustees and the management of the companies backing the schemes. While the trustees might prefer a buyout, the management teams could prefer the cheaper superfund option.



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