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PLSA lays out 4 models for merging U.K. pension funds into superfunds

The government should make it easier for U.K. defined benefit funds to merge into a new type of superfund, or to consolidate some or all services, said the Pensions and Lifetime Savings Association’s DB Taskforce.

In its second report, the task force has called on the government to make it easier for consolidation to happen, and to introduce a new requirement for defined benefit plan trustees to demonstrate to participants and The Pensions Regulator that the pension fund is being run effectively and, if not, what steps are being taken to fix it.

“The Case for Consolidation” outlines how consolidation into new superfunds could work. It examines four models that give trustees an additional option to alleviate risk carried by participants.

The first is for shared services, combining administrative functions across pension funds to achieve cost savings and economies of scale. The report said this would be especially beneficial to small and medium-sized pension funds, and would bring an estimated £600 million ($738 million) of total savings per year.

Asset pooling is the second model, potentially saving a total of £250 million per year, with assets pooled and centrally managed but with pension funds retaining responsibility for their own governance, administration, back-office functions and most advisory services.

The third model, single governance, would see assets consolidated into a single asset pool, with governance, administration and back-office functions also brought together. Aggregate savings could be £1.2 billion per year, made up of £600 million from shared services, £250 million from asset pooling and £360 million from single governance cost savings.

While these three options present savings, “consolidation of scheme elements, whilst beneficial, does not in itself materially reduce the risk to members’ benefits,” the report said.

The fourth option is for a full merger into a superfund, absorbing and replacing existing pension funds. Employers and trustees would be discharged from their obligations for future benefit payments, which instead would be paid from the superfund. Modeling by the task force showed this option could improve funding for the weakest of pension funds in terms of sponsoring employer strength to a 10% or less chance of becoming insolvent, down from a current 65% probability.

“There’s a general assumption that 100% of DB scheme members are guaranteed 100% of their benefits,” which is the intention, but not the reality, said Ashok Gupta, chairman of the DB Taskforce, in a news release accompanying the report.

“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.”

Mr. Gupta said additional benefits would be improved investment by superfunds, and “employers are freed from onerous DB burdens.”