The UK government should legislate for the creation of “superfunds” to consolidate defined benefit (DB) pension schemes, according to a proposal from the UK pensions trade body.

The Pensions and Lifetime Savings Association (PLSA) today issued a report from its DB Taskforce pushing the case for consolidation and pitching superfunds as the best of four models.

The DB Taskforce had flagged consolidation as one of several potential solutions in its first report on the state of the DB sector in the UK. 

Ashok Gupta, chair of the taskforce, said: “We think the biggest gains lie in the merger of schemes into what we have called superfunds. We believe superfunds have the potential to offer great benefits to members, employers, the regulator, the industry, and the economy.”

The taskforce envisaged superfunds as absorbing and replacing existing schemes, taking on both assets and liabilities. Employers and trustees would be discharged from their obligations for future benefit payments, and the superfund would instead carry out the role of both scheme and sponsor.

The PLSA wants the government to make it easier for consolidation to happen, and called for a new requirement for trustees of DB schemes “to demonstrate to members and the Pensions Regulator that the scheme is being run effectively and, if not, what steps they are taking to fix it”.

The superfund route to consolidation would sharply improve the security of schemes with sponsors categorised as “weak” by the regulator, according to the taskforce. It argued that the probability of such schemes failing would fall from 65% to 10% or less if they were able to consolidate.

It acknowledged questions about the affordability of superfunds to sponsors of poorly funded schemes, but said “a superfund could allow sponsors to raise capital from markets or creditors to enable a transfer to a superfund”.

The taskforce’s superfund idea is intended to help improve the odds of members in underfunded schemes getting their full benefits if the sponsor goes bust. The PLSA also said it would look into whether trustees should be allowed to accept benefit reductions as a means of “opening up the benefits of superfunds to more members”.

Calum Cooper, head of trustee consulting at Hymans Robertson, said that cutting back benefits for access to a superfund could be subject to legal challenge as well as going against the comments by the pensions minister, Richard Harrington, that pensions are a promise that must be kept.

The taskforce described entry into a superfund as an alternative to a buyout, an option it said few can afford.

In addition, insurers might find the capital requirements under Solvency II would be less demanding for a superfund than for a buy-out, the taskforce added.

The other three models of consolidation detailed by the taskforce in its report were:

  • Shared services: combining administrative functions across schemes.
  • Asset pooling: individual schemes retaining responsibility for governance, administration, and other functions.
  • Single governance: asset pooling and combination of governance, administration, and back office functions.

The analysis behind the taskforce’s proposal went against that in a recent DB reform paper released by the UK government, in which it downplayed the pressures in the DB system.

The taskforce said that, in contrast to the government, it had taken into account the pressure on scheme sponsors and had “not assumed that sponsors’ deficit recovery contributions are entirely sustainable indefinitely”.

Hymans Robertson’s Cooper challenged the idea of consolidation representing the most effective means to addressing affordability issues in the DB sector. 

”There’s an elegance to the theory but it feels vulnerable to being hijacked by reality,” he said.