According to the Bank of England (BoE) governor Andrew Bailey, recent plans for “pension superfunds” could pose a threat to financial stability.
Bailey has written to the work and pensions secretary, Therese Coffey, to criticise elements of an interim framework for pension superfunds, which was recently announced by The Pensions Regulator (TPR).
This was widely heralded by the pensions industry as a way to protect scheme members in the long-term by avoiding the high cost of a traditional insurance company buyout.
However, Bailey believes that the regulation was not robust enough, and if a large pension superfund sector develops, this could become a systemic risk.
What are pension superfunds?
Pension specialists have spent over two years working on the concept of pension superfunds, through which a number of large defined-benefit pension schemes could be consolidated into one scheme.
So, when employers look to offload their defined benefit pension liabilities, which is a common occurrence to manage risks and costs, superfunds could provide a better alternative than working with an insurer – currently the only option.
In June 2020, the Pensions Regulator produced a 26-page set of interim rules for superfunds ahead of legislation to create a permanent regulatory structure.
Insurers are governed by the EU’s strict Solvency II rules, which require them to hold more capital to pay the pension promises than superfunds would need.
Soon after the interim rules were released, a number of trade bodies and professional societies responded positively.
“We fully support TPR acting to set out clear expectations in its interim regime to protect the PPF and our levy payers in advance of that legislation,” said Pension Protection Fund (PPF) chief executive Oliver Morley.
The Bank of England’s unwavering superfunds stance
The UK Government’s Pensions Minister Guy Opperman explicitly endorsed the regulations soon after they were announced, calling it a “big step towards a healthier and stronger pensions landscape”.
“Well-run superfunds have the potential to deliver more secure retirement incomes for workers, while allowing employers to concentrate on what they do best – running their businesses,” he added.
However, the Bank of England has a history of pension superfunds scepticism. In a 2019 paper, it warned the risk of regulatory arbitrage between superfunds and insurers: “There is a risk that more pensioners may not have the chance of greater security enjoyed by those with annuities, backed by insurance regulation,” the central bank said.
A source close to the Bank said its views had not changed since then. Insurance companies also strongly oppose superfunds, complaining that they would compete for the same business with lighter regulation.
However, Clara Pensions chief executive Adam Saron offered an olive branch to Bailey: “Monitoring financial stability is the governor’s job, so we’d expect him [Bailey] to take an interest in anyone who holds large amounts of assets – insurers, pension schemes and hopefully, one day, consolidators,” he said.
“We’re always happy to explain our model to people and why a bridge to the insurance market like Clara’s will create safer, more stable pensions for members.”