Create £1.5trn superfund to solve pension crisis, taskforce says

A cluster of 'superfunds' created by pooling £1.5trn of assets in existing retirement schemes offers the best route to mitigate Britain's growing pensions crisis, a City taskforce will say this week.

Sky News has learnt that a committee established by the Pensions and Lifetime Savings Association (PLSA) will follow up an earlier report by warning that the current system with thousands of smaller defined benefit (DB) schemes operating independently is "placing the retirement savings of millions...at risk".

The taskforce's final report will paint a stark picture of the challenges facing businesses as they attempt to close their yawning pension deficits, citing the crises at companies such as BHS, Woolworths and Tata Steel (BSE: TATASTEEL.BO - news) .

"Many existing DB schemes were established in 'old world' industries like manufacturing and traditional bricks and mortar retailing," a draft of the report obtained by Sky News said.

"Trends such as globalisation, increased digitalisation and the risks arising from Brexit and wider political uncertainty are impacting and will continue to impact all UK employers."

The final report is due to be published on Thursday.

The pooling of these pension schemes, the taskforce will conclude, could save about £1.2bn in annual administration costs, paving the way for greater efficiency and improved investment returns.

According to its report, the existing deficit in the UK's defined benefit pension system stood at up to £400bn last year, with total assets under management in the UK of £1.5trn.

Twenty-seven million current and future pensioners rely on such DB schemes.

The taskforce will say that creating consolidation vehicles called superfunds would aid employers by allowing them to focus on securing the future of their business while benefiting scheme members by giving them greater security over their retirement income.

Chaired by Ashok Gupta, who led a Bank of England‎ inquiry into pension fund investments, the taskforce will also conclude that there is significant appetite among employers for consolidation.

Larger schemes can take a longer-term approach to investing, while also gaining access to asset classes such as infrastructure which are off-limits to smaller sponsors, the report will say.

A merger into one or more superfunds would relieve employers and trustees from their duty to make future benefit payments, but significant barriers to establishing them remain.

"We believe employers would pay more if in return they could be released from future liability for the scheme," the draft report said.

Superfunds would aim to pay members the full value of their benefits in more than 90% of scenarios, according to the document, while they would be eligible for assistance from the Pension Protection Fund, the industry-funded lifeboat.

New (KOSDAQ: 160550.KQ - news) legislation would be needed to pave the way for the creation of superfunds, which could benefit the wider economy by stimulating investment because of an anticipated uplift in pension benefit security, the draft report said

The PLSA taskforce's final report is expected to recommend that defined benefit schemes should be required to produce an annual statement on governance and investment issues.

Where they were failing to meet benchmarked standards‎, schemes would be required to take action to improve, after which "the Regulator should intervene and require the trustees to take whatever action is deemed necessary - this could include some form of consolidation".