Pensions superfunds in limbo as UK regulators clash

The government and regulators are at loggerheads over UK capital rules for a new breed of superfunds that allow employers to offload pension obligations to former employees.

Superfunds are designed to take over corporate pension schemes with the goal of running them more cheaply and efficiently than the companies that set them up. At present, the only way companies can get rid of costly and unwanted schemes is to pass them on to an insurer, but this is an expensive option.

Regulators and the government are hammering out a regulatory framework for new superfunds, which will include the amount of capital the vehicles will be required to hold to ensure members’ pension promises are protected.

But at a conference in London on Tuesday, David Fairs, executive director of regulatory policy, analysis and advice with the Pension Regulator, said there was a difference of views on capital requirements. “It is a matter of debate within government,” he said.

The disagreement comes as employers face growing pressure to top up their schemes with cash, as deficits widen due to falls in bond yields.

The combined pension deficit of FTSE 350 companies grew by an estimated £16bn in August to £67bn as gilt yields were hit by fears of a global downturn and Brexit uncertainty, according to Mercer, the professional services firm.

The Prudential Regulation Authority, which oversees insurance companies but would not regulate Superfunds, has suggested that the capital regime for the new consolidation vehicles should mirror the tough rules that apply to insurance companies taking over pension obligations — a position backed by the insurance industry.

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Mr Fairs said government departments, the PRA and the Pensions Regulator were having “weekly meetings” to try and reach a “common view”.

“By working closely with government departments and other agencies, we are seeking to address the issues presented by the regulation of DB superfunds to achieve a framework that balances employer affordability, member protection and attractiveness to investors,” the Pensions Regulator added in a statement.

“We believe DB superfunds are potentially a force for good and can provide a secure and safe place for pension saving and help drive up standards.”

The Department for Work and Pensions last year put forward four options for defining capital adequacy for superfunds, including three based on the current DB occupational pensions framework and one on an insurance-like regime.

The DWP, responding on behalf of the Treasury, said: “We continue to work closely with regulators, other government departments and stakeholders to develop proposals for a new regulatory regime for superfunds.”

The PRA, a wholly owned subsidiary of the Bank of England, which is independent of the government, declined to comment.

The Pension Protection Fund, which would provide a safety net for members of superfunds if the vehicles collapsed, said: “Well run superfunds have the potential to provide greater security for some schemes, but unconstrained they pose significant risks to the PPF, our members, levy payers and members of the schemes we protect.

“This is a complex area of work and it is right that there should be detailed consideration to ensure a robust regulatory regime is established.”

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