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Gov't targets 'commodity' treatment of pensions

UK - The UK government has confirmed it is "urgently" looking at ways to address concerns suggesting the buyout market is treating pensions "as just another commodity".

In a parliamentary debate on the Marconi pension fund, now called Telent, Mike O'Brien, minister for pensions reform, said the business model being used by some companies in the buyout sector could result in "losses and gains being arrived at in a way that could put people at greater risk than they should be".

He claimed the issue of people treating pensions as "something with which they can wheel and deal" is one which needs to be approached with caution, but confirmed the Telent case had alerted the government to the "scope for others to use such a business model", which could pose risks to both members of the scheme and the Pension Protection Fund (PPF).

O'Brien warned: "In some new models emerging in the buyout market, the security of an employer is taken away, but adequate capital has not been put in place to replace the certainty and security that the sponsoring employer brings.

"That creates an asymmetry of risk—a business model where the provider benefits if all goes well, but scheme members or the PPF pick up the bill if things go badly," he added.

To combat this, O'Brien revealed he had asked officials at the Department for Work and Pensions (DWP) to "look urgently at what more can be done to maintain confidence and to signal to the City our concern about such models of pensions investment".

The government has already signalled its willingness to intervene and stengthen the powers of the Pensions Regulator as, during a committee session last week, it added an amendment to the current Pensions Bill increasing TPR's ability to appoint independent trustees to schemes where buy-outs are under discussion. (See earlier IPE story: Gov't to increase TPR powers over buyout fears)

But during the debate O'Brien said the government wants to ensure that TPR has "the right powers to protect people's pensions", which could include strengthening TPR's anti-avoidance powers to focus on "a particular mischief".

The minister also suggested the changes could include clarification over whether it is TPR or the Financial Services Authority (FSA) that is responsible for regulating the pensions buyout market, as he claimed the changing market environments "prompt us to keep the boundary between their remits under review".

Although O'Brien said he welcomed the recent innovation in the pensions industry and admitted "there are circumstances in which buyouts are right and work", he warned he "cannot allow the development of business models that raise serious concerns".

"We are dealing with a fast-changing market, with new models in it. I am willing to consult formally, and to bring amendments before Parliament to increase the regulator's powers, if that is the best way forward. I am keen to discuss the issues to see whether we need to take further steps in the coming weeks and months," added O'Brien.

In the same debate, the pensions minister also confirmed the government would not be changing the law to allow schemes which buy insurance products from companies, such as BrightonRock, to either be ineligible for PPF protection, or to be eligible for protection but exempt from the risk-based levy.

BrightonRock plans to offer trustees of all schemes, except the weakest, the ability to insure the sponsor covenant, meaning the insurance company pays out member pensions in full if the employer becomes insolvent.

But following a meeting with the insurer on Monday, O'Brien said: "It is the wrong time to open up the market in the way BrightonRock proposes. PPF is a relatively new institution. It is important that scheme members have confidence in the PPF's financial security and long-term sustainability. We do not want that undermined."

"We also have some concerns about companies cherry-picking lower risk pension schemes, thereby driving up PPF levies paid by others," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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