Interview: Alan Rubenstein
The Pension SuperFund CEO explains how the fund will work
The Pension SuperFund is on track to take on board its first pension scheme by the end of the year, its CEO Alan Rubenstein tells IPE in an exclusive interview. “We are in negotiations with a number of schemes and hope to make a transfer of the first of those schemes by the end of this year. The conversations we are having range from relatively small to extremely large schemes – in the billions.”
The fund is initially targeting pension schemes ranging from £200m (€224m) to £10bn, although eventually it expects to include smaller schemes down to a minimum of £50m. The initial relatively high lower limit enables the fund to access economies of scale more rapidly.
The Pension SuperFund works by accepting bulk transfers of defined benefit (DB) pension assets and liabilities from other occupational schemes. There will be no changes to existing scheme members’ benefits, although the money is pooled with the other schemes’ assets. “As each scheme comes in, there will be a separate schedule which sets out the benefits of the former members of that scheme.”
Instead of the security of having a sponsor’s covenant behind the scheme, Rubenstein explains the covenant “will be replaced by improved funding through a combination of scheme assets and an asset-backed contribution to 115% of prudently calculated liabilities”.
“What differentiates Pension SuperFund from other models,” says Rubenstein, is that “if we generate outperformance, it is shared between the capital providers, who are our underwriters, and the members. One third goes to a members’ trust where the trustee can either use it to pay one-off benefit improvements or to hold as additional reserves.”
The backers of the Pension SuperFund include Warburg Pincus, the global private equity firm, and former founder of the Pension Insurance Corporation Edmund Truell’s Disruptive Capital, which have both contributed £250m, making £500m enough to cover £5bn of pension liabilities, says Rubenstein.
He says: “That’s just a start. We have been approached by a number of people who would be interested in the next round of funding and our existing backers have said: ‘Once you have done the first £5bn, we will commit to more money’.”
On the regulatory side, Pension SuperFund is an occupational scheme and comes under the remit of The Pension Regulator (TPR). “We expect all schemes initially will go for clearance [from the TPR] in every case.”
Asked whether some scheme members might find themselves worse off after consolidation, Rubenstein points to safeguards such as independent trustees (in the process of being appointed) who would have control over the assets and that if the worse comes to the worst, the scheme has PPF eligibility. “It is in everybody’s interest, both the scheme members and the investors, for us to run this in a very conservative manner. Cash flow matching is our first priority. Hedging interest rates and inflation rates come first.”
He expects about 55% of any potential asset allocation will be in bonds and hedging instruments and 45% will be in equities, alternative assets such as infrastructure and hybrid asset classes such as long leases. “That asset approach is very similar to the approach adopted by the PPF,” says its former chief.
One concern is that there is a high and arguably unacceptable risk for the members and trustees who transfer to consolidators. Having benefits bought out with an insurance company is much safer. Rubenstein counters: “I absolutely agree that transferring to an insurance company is an extremely safe way of doing things. It is also a very expensive route and is not available to everyone. We believe that our approach with 115% coverage on a prudent and a low-risk investment strategy is very safe, although not as secure as insurance, but we don’t expect to appeal to the same market.”