Outsourced 'superfunds' proposed to shift DB Pension burden from employers

The suggested move is likely to prove controversial as millions of employees would be forced to accept cuts to their pensions.

The UK government is proposing to create so-called “super-funds” that would absolve employers from the responsibility of having to pay out final salary pensions.

The measures are being proposed in a bid to help companies struggling to cope with the costs of their defined benefit (DB) pension schemes by allowing them to be placed in an outsourced super-fund for a one-off fee. Millions of employees would be forced to accept cuts to their pensions as a result, making the proposed move highly controversial and likely to be disputed by both unions and pensioners.

DB schemes, which guarantee workers’ retirement income based on their salary and length of service, have become an increasing burden for employers over recent years due to a mix of poorly-performing bond markets and historic underfunding.

Pensions minister Richard Harrington said in an article in The Telegraph newspaper that the pension system required major reform because the UK was a “very different place” to when it was originally set up. As a result, employees would need to help “soften the blow” if DB schemes were to remain viable.

“I have a very clear set of criteria in mind when it comes to the future of the defined benefit sector,” he attested. “Any changes must balance the needs of consumers, employers and schemes and I don’t want to see it tipped in favour of one particular group.”

The UK’s workplace pensions body, the Pensions and Lifetime Savings Association, is backing the government’s proposals as it estimates that there is only a 50% chance that the weakest schemes will pay out members in full. Deficits of FTSE 350 DB schemes have reportedly trebled over the last 12 months.

As a result, it believes that pooling assets in the manner suggested would help protect pensions and make high-profile failures less likely. It should also offer workers better pay-outs than the Pension Protection Fund, which guarantees the pensions promised by failed companies.