Luke Webster and I were delighted recently to be invited to give evidence to the Work and Pensions Committee of Parliament as part of their inquiry into the Defined Benefits White Paper recently published by the Government.
One of the aspects of giving evidence to the Committee is that written submissions in advance are welcome, as it helps to prepare the members for the main discussion points and can act as a trigger for questions.
Our full written evidence is available here but I thought I would summarise why we think consolidation in general and The Pension SuperFund in particular is a real solution to the question of how we should manage the risks in Defined Benefit pension schemes.
In brief the benefits of consolidation can be summarised as lower costs per member (due to economies of scale in procurement), improved investment returns and lower relative risk (due to the ability to invest in asset classes such as infrastructure, which can provide both an improved match for cash flows and yield an ‘illiquidity premium’) and better governance and resourcing (providing a governance ‘bonus’).
We created The Pension SuperFund with the aim of consolidating UK occupational pension schemes, bringing together the defined benefit pension assets and liabilities from other UK occupational pension schemes with no change to scheme benefits. The main difference is that the sponsoring employer’s covenant is replaced by financial security, with initial assets in The Pension SuperFund equal to 100% of the liabilities and with an additional level of security provided by an asset backed contribution arrangement, giving overall protection equal to 115% of the liabilities.
This, together with a low risk asset strategy, supported by full liability hedging, means that members can expect their full benefits to be delivered in an overwhelming majority of cases. and to participate, through our unique profit sharing arrangement, in the success of The Pension SuperFund. Meanwhile, for a typical scheme sponsor, we will create the ability to close out legacy defined benefit liabilities at a substantially lower cost than the often unaffordable insurance alternative whilst importantly providing members with access to the benefits of consolidation and improved pension security.