The Pensions Regulator (TPR) is working with the government to update rules and guidance surrounding defined benefit (DB) superfunds.
In a blog post, David Walmsley, interim director of supervision, expressed hope that the forthcoming Pension Schemes Bill would “provide impetus for further innovation and expansion”.
The government has stated that DB superfunds will form an important part of its pension reforms as it seeks to encourage consolidation.
As well as the bill, TPR is currently working on a document, ‘DB Scheme Endgame Options Guidance’, due out later this year.
There is currently only one authorised DB superfund, Clara-Pensions, but consultancy group LCP has forecast that a second provider could enter the market this year.
At the end of last year, TPR estimated that around 40% of pension schemes met its first two “gateway tests” for superfund transactions.
However, to meet this growing demand the superfunds sector needs more scale, Walmsley said. To achieve this and make transactions smoother, TPR has sought to address “uncertainty” and “misconceptions”.
Walmsley said trustee boards exploring a superfund transaction did not need to obtain a formal buyout quote as long as an actuary had given an estimate for the cost of this route.
Similarly, trustees could rely on TPR’s extensive due diligence on authorised superfunds rather than conducting their own detailed investigation.
Instead, trustee boards should focus on establishing a “comprehensive rationale” for a superfund transaction, including member outcomes and all “pros and cons”.
Cash injections, capitalisation, link to the employer and treatment of surplus should all be considered, Walmsley said.
He emphasised that a strong rationale was “vital” when swapping an ongoing employer covenant for a superfund, but added that it was “a misconception that we will not provide clearance in these circumstances”.
He cited the example of engineering company Wates Group, which transferred its DB pension scheme to Clara in December.
Walmsley also clarified that TPR did not require “boundary conditions” to be maintained until transfer, but said terminating these would require explanation. Boundary conditions in superfund agreements set out trigger points that would require key terms to be revisited.
A survey conducted late last year found that three in five pensions industry professionals believed superfunds could provide a better outcome than insurers for members of schemes seeking to exit the Pension Protection Fund’s assessment period.
