Pensions regulator sets ‘high bar’ for new superfunds

The Pensions Regulator (TPR) has published guidance giving the green light for so-called DB pension ‘superfunds’, ahead of government moves, but has warned it wants to see ‘stringent’ standards and a robust regulatory framework for this new approach

DB superfunds offer a way for employers to consolidate existing schemes, by replacing the sponsoring employer with a capital-backed vehicle or a special purpose vehicle (SPV). They create a large retirement savings fund which includes different company schemes, meaning participating employers are no longer liable for member benefits.

TPR’s guidance is for those setting up and running a superfund ahead of the government’s proposed legislative authorisation and supervision framework. Anyone seeking to run a superfund or new business model aimed at running on a scheme without a sponsor, is advised to contact TPR about their plans before launching.

TPR’s guidance, which comes into force immediately, sets out the regulator’s expectations for how DB consolidator superfunds and other new models must show they are well-governed, run by fit and proper people and are backed by adequate capital. It also explains how they will be assessed and regulated.

The pensions regulator said trustees need to be certain that a transfer to a superfund is in their members’ interests. They should also only consider using a superfund or new business model once TPR has completed its assessment.

TPR will be providing more information for trustees and employers in the coming months, and said it has set out its interim expectations on how these new schemes will run, ahead of any specific legislation dealing with superfunds, in order to ensure a robust framework for their operation. TPR will work with government to keep the operation of the interim regime under review and act if it appears changes are required.

Guy Opperman, minister for pensions, said: ‘The publication of today's interim regime for DB superfunds is a big step towards a healthier and stronger pensions landscape.

‘Well-run superfunds have the potential to deliver more secure retirement incomes for workers, while allowing employers to concentrate on what they do best - running their businesses.

‘I look forward to learning from the experiences from the interim regime, which will provide valuable insights as we develop and finalise our plans for a longer term legislative solution.’

TPR said capital adequacy is among the most important areas of the interim regime as under the superfund model for DB schemes there will be no employer covenant.

TPR will require superfunds to hold sufficient assets to meet the promises to savers with a high degree of certainty. This will include the requirement for the scheme’s liabilities to be calculated using specific assumptions set out in TPR’s guidance and for additional assets to be held in a capital buffer.

TPR Chief Executive Charles Counsell said: ‘Our priority is the protection of savers. In line with our clear, quick and tough approach, we are setting out now how our interim regime will assess and regulate superfunds, including new models, so there can be no doubt about the standards we expect before the government’s permanent authorisation regime comes into force.

‘We have set a high bar to ensure savers can have confidence in superfunds should their pension be transferred into one in the future.

‘We have taken bold action now to ensure that the market develops in the best interests of savers, particularly as the impact of the Covid-19 crisis may prompt some sponsoring employers and pension trustees to consider what they can do to meet defined benefit pension promises in the future.’

Charles Ward, a professional trustee at Dalriada Trustees, said: ‘We welcome the introduction of a robust framework for trustees when considering the use of a superfund.

‘It is encouraging to see governance requirements and financial standards being put in place, both of which suggest that these funds will need to be committed for the long term and managed in a prudent way.

‘However, the range of schemes for which a superfund is appropriate is likely to be narrow given the prohibition on transfers for well-funded schemes (within five years of the "gold standard" insurance company buyout) and the difficulty that weaker employers will have in finding collateral to contribute to their scheme, even if this is less than the buyout deficit.’

DB superfunds guidance

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