Superfunds in a post-COVID world

As new figures from the Pension Protection Fund show the shortfall of final salary schemes in deficit grew to £256.4bn during April, Joe Dabrowski examines how the superfund structure could help… if only we had one.

With the coronavirus shutdown that is wreaking havoc on companies unlikely to be lifted any time soon, we can expect the combined deficit to jump further as schemes face the triple whammy of falling asset prices, lower interest rates and weakening employer covenants. All set against, doom and gloom forecasts for the future of the global economy, with the Chancellor warning of a significant recession.

In the short-term, pension consultancy LCP suggests hundreds of companies could push back attempts to fill shortfalls in their pension scheme funding as the coronavirus crisis intensifies, with top-up contributions to be cut by at least £500m this year.

Debenhams has already missed a payment and the Arcadia group, which owns Topshop, plans to stop them temporarily. High-street fashion chains Oasis and Warehouse have become the latest big-name retailers to collapse into administration.

There is no obvious modern precedent for the current situation but it seems likely that, even with substantial packages of Government support, we will see greater employer insolvencies across multiple sectors, higher scheme deficits, and lower interest rates for the foreseeable future.

This is likely to mean increased calls on the Pension Protection Fund, the safety net called upon to back people’s defined benefit pensions when their employers or former employers go belly up.

The crisis has really cut against the grain. In early March, a few weeks before the impact of the virus truly emerged, the Pension Regulator was highlighting its desire to reduce the length of pension recovery plans and to press for faster closure of deficits – which had remained ‘stubbornly high’, at 7.8 years on average, as the economy recovered from the last economic crash. And to some extent nudged along by Government giving the Regulator a new ‘employer friendly’ objective in response to the 2008 financial crash.
Looking ahead, and at the severe economic headwinds forecast by the OBR and IMF, supporting business is again likely to explicitly or implicitly trump looking after savers or closing deficits at the real or perceived risk to economic growth.

But it is essential that we look after savers, both pensioners who do not have the option of returning to work if their pension payments are compromised, and younger generations who may end up bearing the bulk of the cost of the second gigantic economic recovery of their lifetime.

We can do that by making existing measures work to some extent, but it is time to think about the orthodoxy of the current system and its consequences. The last 10 years saw employers spend more than £150bn trying to plug deficits only for recovery plan lengths to remain broadly unmoved. Do we do exactly the same again? Or we do something different? And at what cost – to employers, to younger generations, to schemes?

Our work with the DB Taskforce highlighted the limited choices and tough compromises that schemes and employers have had to make to date. Between closing deficits and company survival or growth; between former employees, and new and future ones. If the next few years look anything like the last 10, the need to find alternative solutions has never been more acute.

Making a real impact requires bolder action. The Government has promised change in the form of superfunds for some time, but has stalled its progress. Super funds are a type of consolidator whose structure would allow it to collect together several corporate pension schemes and, with the help of investor capital, run them more efficiently and cheaply than the individual sponsoring employers; the super fund will then run the schemes until either all the pensions have been paid or the scheme is financially strong enough to be passed on to an insurance company.

If the government wants to help schemes and stressed sponsors, now is the time to press on with a regime that can offer a ‘win-win’ for savers and employers. Because if things turn out to be even half as bad as the projections, having as many options available to provide savers with their full benefits is the only sensible course of action.

Read more from the Pensions and Lifetime Savings Association here