Ray Paygott, Partner at KPMG, interviews Steven Ross, CEO at Ross Trustees Limited, on the potential implications of superfunds on pension scheme members.
Many investors know all about the two-rule mantra: rule number one, never lose money; rule number two: don’t forget rule one. It may be flippant, but it works.
So why are we now seeing a number of serious City investors looking to set up pension superfunds in order to acquire defined benefit assets and liabilities? For years, this has been an issue that makes CFO’s hearts sink – and the death of many a transaction.
The basic premise seems to be to acquire defined benefit pension schemes – and run off the liabilities efficiently to make a profit. There is sound logic behind the current crop of superfunds assuming that the time is right to professionalise the running of schemes and unlock some of the regulatory prudence involved in funding and insurance solutions.
However, pension funds have been plagued for many years by slow decision making, poor data and a lack of understanding of the issues and opportunities involved in changing the status quo.
This is part of the reason the Pensions Regulator favours consolidation. Yet my guess is that he didn’t envisage that solution coming in the form of superfunds looking to make a return for their shareholders.
However, good ideas don’t always make money. It is important to consider what this will mean for members: will they be the ones who would ultimately lose out if things go wrong?
I posed that question and others to Steven Ross, CEO of Ross Trustees Limited.
A transfer of assets and liabilities to a superfund would require Trustee consent. What considerations would you have before agreeing?
It will be important to consider how a transfer would impact on members – this would involve understanding how well capitalised the new vehicle was, access to other funds if needed, PPF eligibility and softer areas such as the quality of on going service they would receive. I think many Trustees would want to take comfort around matters such as member options from a superfund. A clear code of conduct would need to be agreed at outset particularly if the shape of members’ benefits was to change.
How do you think superfunds will make a return for shareholders – and what does this say about the current governance of UK pension funds?
The rationale must be around economies of scale and efficiency of servicing schemes. I think well-run schemes can both manage risks and costs effectively and having professionals involved in running the Scheme with good quality advice can definitely deliver better outcomes – we are seeing this change generally in the market.
The opportunity for superfunds is those pension schemes who have not implemented an effective governance regime.
Are superfunds likely to be a good thing or not for scheme members?
We expect superfunds to be regulated by the TPR and not PRA so this will be a fundamental difference for members. In benign conditions, members may not notice the difference but in stressed situations, the tighter regulations affecting insured arrangements are likely to be welcomed by members.
What do you think members will think of superfunds?
Members may not know the difference, to be honest, between a superfund, their ex-employer’s scheme and an insured arrangement. That’s why the Trustee has such an important role to play, involving proper due diligence of all options and clear communication to the members.
Are superfunds here to stay – or is it an idea that’s here today and gone tomorrow?
That’s a very interesting question. The logic is sound, but similar ideas have been tried and failed before. We have spent some time considering how the thinking can be moved. The challenges will be to get momentum and a general acceptance that superfunds are potentially a valid alternative.
The next five or ten years will be very interesting!