Pension superfunds can save on costs, but may be prone to failure.
Could your pension be transferred into a “superfund”? Several new players in the pensions market say they are already in talks with companies about taking on their occupational pension schemes, even though the government has only just published a consultation document on how such arrangements would be governed.
The idea is that a pension superfund would consolidate a number of defined benefit (DB) company pension schemes (where payouts are guaranteed) into one set-up, benefiting from economies of scale, operational efficiencies and – hopefully – a mix of investment styles.
Members’ benefits would be unaffected, though savers in pension schemes underwritten by an employer currently facing financial difficulties might be relieved to transfer. Many employers, meanwhile, would be pleased to rid themselves of their pension liabilities, though they would be charged for the privilege.
However, while the superfund initiative has advantages, there are also some concerns about how it will work in practice. The new funds might be allowed to operate with less capital backing than the insurance companies that also compete in this industry. In theory, that could leave them more prone to failure. If a superfund were to collapse, savers would be transferred into the Pension Protection Fund (PPF), the lifeboat scheme that protects DB pension scheme members when an employer goes bust. However, the PPF has limits on how much compensation it will pay, with members likely to lose at least some of their benefits.
Nevertheless, ministers are positive about the potential for superfunds to take on liabilities currently causing employers financial difficulties. Many businesses with DB plans are struggling with the cost of their obligations and facing pressure from regulators to increase their payments into their plans.
Under proposals published last month, the pensions regulator would be given new powers to police superfunds to ensure proper standards of consumer protection. Ministers also propose to introduce a “fit and proper person” test that trustees of superfunds would be legally bound to meet.
If superfunds get the go-ahead, consolidation could be very rapid. Some 11 million Britons are currently members of DB schemes – though many plans have been closed to new savers – that are often run by small employers who lack the resources to manage the funds in the most efficient ways possible.
Benefits change leaves pensioners worse off
Thousands of people on low incomes and currently eligible to claim pensions credit will in future miss out on this benefit under new rules published last week by the Department for Work and Pensions (DWP).
Currently, pensioners whose partners are still below state retirement age can claim pension credit, a top-up to their state pension of around £255 a month, if their income is below set thresholds. From May, however, new pensioners with a partner still of working age will have to claim universal credit instead, with a maximum weekly payment for couples of around £115 a week.
In the worst cases, new pensioners will miss out on around £7,300 of income a year they would be entitled to if reaching state retirement age today.
The average age gap between couples is 2.6 years, suggesting that new pensioners will, in future, miss out on 135 weeks of the higher pension credit benefit before they are eligible to move on to the more generous payment, according to charities working with older people. That would equate to a loss of around £19,000.
With single people effectively better off under the new rules, since they would be entitled to pensions credit as soon as they reach state retirement age, the DWP may be forced to investigate whether older couples claiming their relationship had broken down were genuine.
Couples already claiming pensions credit are unaffected by the changes.
Overpaid scheme member harassed
You would imagine that pension-scheme members who have been overpaid should be given a reasonable period during which to rectify the problem, and not be subjected to unfair legal restrictions.
But this certainly wasn’t the case when retired pension-scheme member David Carrington learnt that he had been paid £28,000 too much over 11 years. He had been contributing towards a fund run by TPT Retirement Solutions.
When the scheme spotted the error, it told him it would immediately cut his pension by 40% in an attempt to claw back the overpayment. Carrington then sought to negotiate a settlement to pay back the money over an extended time period, but was told he would be expected to sign a non-disclosure agreement preventing him from discussing the case.
Pension specialists accept that schemes have a legal duty to seek to recoup such losses, but warn that unreasonably aggressive requests are unlikely to stand up to scrutiny. The Pension Ombudsman has the power to intervene in such disputes on the member’s behalf – potentially even to order the scheme to write off some of its overpayment. There will soon be more such cases, with schemes currently following instructions from HM Revenue & Customs to check their record-keeping for payment errors.