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Pension Funds

U.K. government seeks feedback on consolidating corporate pension funds

The U.K. government is seeking industry input on how it should facilitate a consolidation of corporate defined benefit funds, the Department for Work and Pensions said Friday in a consultation document.

The DWP wants plan sponsors, trustees, consolidators, participants, life insurers and pension experts to share their views on how the consolidated pension funds — multiemployer superfunds — should be managed and regulated.

The idea of consolidating corporate pension funds in the U.K. gained momentum earlier this year after a government white paper said consolidation could help reduce costs and improve governance.

The consultation's aim is to help DB funds manage legacy pension benefits for closed funds more efficiently. The U.K. government will write legislation that will stipulate how risks associated with replacing an employer-sponsored pension plan with one that includes financing from external capital and consolidators' commercial interests within the superfund should be managed, while participants' benefits are protected.

The government plans to create an authorization process that will select those superfunds that meet the government's criteria. Superfunds will need to be financially sustainable and adequately funded, have contingency plans to protect participants and have effective administration, governance and investment arrangements, the DWP said.

The Pensions Regulator wants to regulate any superfunds that are created before an authorization process is implemented, the regulator said Friday.

The DWP is asking in the consultation whether TPR should be given powers to supervise superfunds under the upcoming legislation. The regulaor said Friday: "We will be regulating superfunds before an authorization framework is legislated to ensure members' benefits are protected. As occupational DB pension schemes, we expect superfunds to comply with all relevant codes and guidance. We will scrutinize each superfund that enters the market against the areas outlined in the DWP consultation, and this guidance is based on those requirements. We will update this guidance accordingly with any changes."

"A key aspect of our supervision of (a) superfund will be the scrutiny of transfers in and out of your pension scheme. As part of this process, we will expect employers to apply for clearance in relation to transfers and we will expect to see evidence of trustee due diligence," The Pensions Regulator said.

The consultation period will run until Feb. 1.

Commercial consolidators and industry experts welcomed the consultation.

"The comprehensive proposals around the governance of superfunds published today are a positive step forward," said Luke Webster, CEO of The Pension SuperFund, London, in an emailed comment. Pension SuperFund was the first U.K. corporate superfund created, but it is still waiting for authorization from TPR to operate. "They provide the framework for consolidators to help solve the issue of DB pension affordability so that employers can keep both their promises to their scheme members and get on with generating economic growth. There is nothing in the guidance that is incompatible with our initial transaction and, having successfully agreed (to) commercial terms with the sponsor and trustees, we can move to submitting this first transaction for regulatory clearance. Our proposal will greatly improve the funding of that scheme, whilst also giving its members the opportunity to participate in any future surplus over and above the buffer funding we will maintain."

Alistair Russell-Smith , head of corporate DB at Hymans Robertson, added in a separate emailed comment: "The publication of the DWP's consultation today shows the momentum that continues to build around consolidation in DB. Commercial consolidators will lead to better outcomes for many DB members than the current environment. If they can be the trigger that persuades corporates to pay a significant cash injection into their DB scheme in return for a clean break, then this will lead to better funded schemes, a vast improvement in member security, and far lower risk to the PPF (Pension Protection Fund). There are a cohort of schemes that are already close to (doing a) buyout."

Mr. Russell-Smith added: "Consolidators give the opportunity for the next wave of schemes to become fully funded on a low-risk basis, where the employer can afford the cash injection."