PRA says there is no need for it to assume regulation of pension funds

Written by Marek Handzel

20/10/2023

The Prudential Regulation Authority (PRA) has said that it sees no need for it take over or assume any regulation of pension funds, and has not seen any new risks emerge that would change its current position on defined benefit (DB) superfunds.

In a written response to Work and Pensions Committee chair, Stephen Timms, who previously asked him to clarify whether or not the watchdog was satisfied with the government's position on DB pension consolidation, PRA CEO, Sam Woods, said there is no need in his view to disturb existing regulatory arrangements.

"The PRA has expertise and experience in insurance companies and not pension schemes," Woods wrote.

"There are structural and legislative differences between pension schemes and insurers and we see limited synergies from combining their oversight in a single institution."

Nevertheless, if PRA-regulated entities set up pension superfunds, then the watchdog would need to see some clear separation between superfunds and insurers undertaking annuity business within the same organisation.

"The presence of both within the same group could effectively dilute the protection that policyholders currently enjoy," Woods continued.

This is because the risk that a superfund, by being held to a lower financial standard than insurers within the group, would dilute policyholder protection if the group found itself needing to support its superfund is still present.

"This risk directly impinges on the PRA’s statutory objectives," said Woods.

PRA would need to develop an approach to group regulation and supervision of groups in this position that would preserve the level of protection that government decides is appropriate for insurance policyholders.

"The PRA would also need to establish supervisory colleges with the Pensions Regulator and ensure the communication and information-sharing systems and protocols facilitate effective regulation and supervision by each regulator," he continued.

"We understand that in order to attain the government’s policy goals, the financial standards applied to superfunds will need to be somewhat lower than those that the government has set for annuity business in life insurers," added Woods.

"But this creates the potential for regulatory arbitrage: that schemes that could have achieved the higher standard of financial security offered by transfer to an insurer are instead transferred to a superfund."

The risk to policyholder protection could be alleviated by further government policy, according to Woods.

One way would be to require superfunds to adopt a "bridge to (insurer) buyout" model, or by a robust gateway governing, which schemes may transfer to a superfund, or some combination of the two.

"The DWP has opted for a gateway approach," he confirmed.

In response to a question from Timms on what The Pensions Regulator (TPR) would need to be alert to in regulating pension superfunds, Woods stated that TPR would have to be alert to the same key areas that the PRA considers in its regulation of life insurers: capital, liquidity, governance and risk management, reporting and disclosure, and resolvability.

This is because superfunds would be similar to life insurers that write annuities, where the liabilities are fixed and long term, and financial resilience is provided by capital, rather than by a covenant from a sponsor.

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