The next step towards a superfund regime

The Pensions Regulator has published its revised superfund guidance, three years since the interim guidance on the setting up and running of DB superfunds was last updated. 

In its revised guidance the TPR noted that when it published its initial superfunds guidance in 2020, it had committed to review it within three years in respect of whether profits could be extracted before members’ benefits are bought out in full.

During those three years one superfund that has completed the TPR’s assessment successfully and no transactions have taken place to date.

TRP noted that there had been seen some material changes in the market conditions since the guidance was published in June 2020 and the update reflected this.

The updated superfunds guidance and guidance for prospective ceding trustees and employers focuses on how trustees of a superfund’s pension scheme should approach managing the funding and governance risks.

Key updates include:

• An easing of the way schemes transfer to a superfund such as extending the period for the gateway, being clearer when TPR believes think it right that a scheme can consider transfer to a superfund, and allowing for more time to demonstrate its expectations for capital have been met.

• Changes to funding expectations including an amendment the discount rate from gilts+0.5 per cent to gilts+0.75 per cent reflecting changes in the market but maintaining saver security as paramount.

• Signalling a change in its position on profit extraction, although the TPR said it would be consulting further with industry on how this will work to help create a system that worked for both providers and members.

Simon True, CEO of Clara-Pensions, said the changes the regulator has made align the interim regime with DWP’s plans for superfunds legislation and provide important clarity to DB pension scheme sponsors and trustees.”

He added: “The changes will also help ensure consolidation is always available as a practical, strong option for DB pension schemes that are unable to afford buyout in the near future. We are particularly pleased to see a recalibration of the risk discount rate, with alignment to market conditions, and the enhanced clarity on the clearance process.”

 “Along with the government’s recent response to its consultation on DB consolidation, we anticipate that this update will continue to build confidence in commercial consolidation and Clara’s model in particular. We are in active discussions with more than 10 schemes, with combined assets of over £4 billion, and we remain confident of progressing with our first transactions soon.”

Superfunds: The next phase

Gordon Watchorn, partner and head of corporate consulting at LCP said: “A combination of relaxed entry requirements in the guidance and more competitive pricing opens the door to more superfund activity. Pension schemes can now start to forge ahead knowing they have the information needed to make informed decisions about the options for their scheme and with the comfort that the regulator is doing all it can to allow the market to develop and thrive. Sponsors need to revisit their pension strategy to ensure the next phase of the journey is optimal based on all options available.” 

“Sponsors and trustees should now have comfort in the viability of these consolidator options and existing consolidators in the market may see interest turn into completed transactions. The guidance could also pave the way for a number of new providers to make their entrance into the market, which would be great for schemes considering this option.” 

Dev Gandhi, senior consultant at LCP, said: “This guidance isn’t just about adding more options for sponsors and schemes; it’s about enhancing the quality of those options. Pension schemes now have a richer tapestry of choices that can lead to better outcomes for their members”. 

“Schemes are almost spoilt for choice when it comes to endgame planning. With the improvement in pricing, working out which end game is right for a scheme is now more interesting and relevant to a wider audience. This means it’s imperative that schemes get the right advice to help navigate what could soon be a burgeoning market.” 

Superfund regime

In his Mansion House speech last month Chancellor Jeremy Hunt said the UK’s defined benefit pensions landscape was too fragmented and the government would be pushing forward with plans to create a superfund regulatory regime.

Following the speech the Department for Work and Pensions (DWP) published its response to a consultation The consolidation of defined benefit schemes.

The TPR defines a superfund as a vehicle that, upon entry or at some point in the future, allows for the severance or substantial alteration of an employer’s liability towards a DB scheme, or the DB section of a hybrid scheme, and where one of the following conditions applies:

• The scheme employer is replaced by a special purpose vehicle (SPV) employer. This is, to all intents and purposes, a shell employer and is usually put in place to preserve the scheme’s Pension Protection Fund (PPF) eligibility.

• The liability of the ceding employer to fund the scheme’s liabilities is replaced by an employer, backed with a capital injection to a capital buffer (generally created by investor capital and contributions from the original ceding employers).

The replacement employer, backed by a capital buffer, will usually support a consolidator scheme. Some of the important features of a consolidator scheme include:

• A bulk transfer of a ceding scheme’s liabilities to a consolidator scheme, which is prepared to accept the liabilities of a number of schemes from unconnected ceding employers.

• It will have its own governance and administration (these functions may be in-house, or outsourced).

• There will usually be one trustee board.

(Source: The Pensions Regulator)