Regulator issues guidance on £170bn pension ‘superfunds’

The Pensions Regulator (TPR) has published new guidance for trustees and employers on transferring to defined benefit (DB) ‘superfunds’, as PwC research suggests up to one million pension scheme members and £170bn of assets could take this route over the next decade

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 launched its interim regime for superfunds in June, ahead of proposed government legislation. The regulator has now published new guidance on the issues trustees and employers must evaluate when considering a transfer, to ensure a superfund is the right option for them and in their members' interests.

Nicola Parish, TPR’s executive director of frontline regulation, said: ‘We know that some employers and trustees are keen to explore whether a superfund could provide another option for their DB scheme and for employers allow them to focus on future sustainability.

‘However, while we await government legislation, we are determined to protect savers who may be moved into a superfund by rigorously assessing providers and then supervising them closely.

‘Trustees need to ensure they are confident a superfund is the right option for their members, the transaction meets the gateway principles and only consider using a superfund named on the TPR website.’

TPR said it continues to assess existing superfunds against the expectations set out in its interim regime, including that they are well-governed, run by fit and proper people and are backed by adequate capital.

It will only add a superfund to its planned online list of providers once the provider has clearly demonstrated, through robust evidence, that they meet the expectations.

Future developments

Analysis undertaken by PwC has found that over the next decade about 600 of the around 5,400 DB pension schemes could pass the Department for Work and Pensions’ (DWP) three ‘gateway principles’ and be sufficiently well funded to transfer to a superfund.

This equates to around £170bn of pension scheme assets or about 10% of the total UK DB pension scheme universe.

PwC expects several billions of pension assets will transfer to superfunds during 2021 and 2022, largely relating to pension schemes whose employers are in distress or already insolvent.

In these cases, the capital buffer offered by the superfunds is expected to offer a clear improvement to the likelihood of members receiving their benefits in full.

This is compared to the alternative of the pension scheme entering the Pensions Protection Fund (PPF), which typically results in reductions to member benefits over time.

While initial transfers are likely to come from pension schemes with weak employers, PwC says future superfund transactions may have a different focus. 

Emma Morton, PwC pensions director, said: ‘As the superfunds grow in scale and build track records of performance, we expect trustees of pension schemes with stronger employers to see the benefit of transferring to a superfund.

‘For schemes that have no clear way of securing members’ benefits with an insurance company, but otherwise think that’s the right strategy for them, a superfund could be the next best thing.

‘Trustees will need to consider whether a transfer to a superfund would increase the likelihood of members receiving their full benefits.’

To transfer to a superfund, trustees will need to demonstrate that the gateway principles have been met by showing that the scheme cannot afford to buy out now and has no realistic prospect of being able to do so in the foreseeable future. The superfund must also improve the likelihood of members receiving full benefits.

Stephen Soper, PwC senior pensions adviser, said the creation of superfunds was likely to drive further innovation.

‘An obvious alternative structure is one where a scheme transfers to a superfund but retains some employer covenant link.

‘We also expect that some well-funded pension schemes will set up their own capital buffer in a similar way to superfunds to support a scheme run-off structure with a contingency for sponsor insolvency,’ he said.

TPR’s guidance is arriving around 18 months after the DWP consultation on DB pension consolidation. It will be used in an interim period before a new authorisation and supervision legislative framework is put in place to cover superfund transactions. DWP is currently working to establish new legislation to govern superfunds which is expected to emerge in the current parliament.

Further reading:

DB superfunds guidance

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