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Pension funds, regulators throw support behind U.K. superfunds despite questions

Pension fund executives and the U.K. Pensions Regulator have welcomed a proposal by the Pensions and Lifetime Savings Association for defined benefit funds to be merged into superfunds.

The PLSA's DB Taskforce called on the government this week to facilitate consolidation, which it said could save occupational pension plans up to £600 million ($737 million) in shared administration costs alone. The association published a report proposing four models of consolidation, with one suggestion to create a superfund and another to require DB plan trustees to demonstrate that funds are effectively run.

Speaking on a panel at the PLSA's annual investment conference in Edinburgh on Thursday, Chris Hitchen, CEO at RPMI — which manages the assets of the £25 billion Railways Pension Scheme, London — welcomed the proposal. He said RPMI was able to achieve £100 million per year in savings following consolidation — RPMI's investment program pooled 14 funds into five starting in early 2014. Mr. Hitchen added he believed consolidation could bring even bigger savings than the figures estimated by the PLSA.

The U.K. regulator also welcomed the proposal. However, fellow panelist Lesley Titcomb, CEO at The Pensions Regulator, said “the pension sector is not systemically failing.

“The issue is around the stressed plans, not all of the pension funds. It is not clear how the stressed plans will achieve the 90% funded status in order to be able to enter the superfund.”

PLSA said in its report that superfunds should be expected to meet strong funding criteria, which might require a 90% funding level on an ongoing basis.

Charlotte Clark, director-private pensions and stewardship at the Department for Work and Pensions, agreed the barriers to consolidation are not yet known. Ms. Clark questioned why plans weren't taking the initiative to consolidate already, given the benefits.

Ashok Gupta, DB Taskforce chairman, said the risk of benefits being unpaid could drop to 5% from 40%. “The risk could be eliminated through a superfund model, where employers would pay a set fee, rather than one that is based on guarantees.”

One of the elements of the proposed models would see pension funds merge their assets in a move that could save them £250 million a year.

However, panelists questioned whether liabilities could also be pooled, posing a challenge to consolidation for some plans.