The Pensions Regulator (TPR) has updated its guidance to allow defined benefit (DB) superfunds to release capital up to twice a year, under specific conditions.
This change aims to encourage market innovation while ensuring protection for scheme members.
TPR has also allowed for instances in which trustees may choose capital-backed arrangements (CBA) or superfunds with lower capital adequacy if it results in a better outcome than buying out the scheme with fewer than full benefits.
The Pensions Regulator interim executive director of strategy, policy and analysis Nina Blackett says: “We expect superfunds and capital-backed arrangements to increase as the DB market consolidates. We strongly support innovation in the interests of savers, and in updating the guidance we have worked closely with industry.
“The introduction of capital release will make it more attractive for providers to enter the market because it will enable surplus above a healthy funding level to be taken ahead of buyout. The inclusion of superfunds in the new Pension Schemes Bill should provide confidence to potential market participants.”
Hymans Robertson head of alternative risk transfer solutions Iain Pearce says: “We welcome this latest guidance from The Pensions Regulator (TPR) as a crucial milestone in the industry.
“To date, TPR’s interim guidance has not allowed providers to generate ongoing returns from successfully managing the risks within a superfund. This has effectively restricted commercial superfund models to temporary “bridge to insurance” models, as seen in the first two Clara transactions. Having closely scrutinised the Clara structure and those two transactions, this latest evolution in the guidance is less restrictive and signals that the superfund market is truly open for business and innovation.
“Having perhaps understandably taken a cautious approach for the first steps in the development of this market, TPR’s guidance is now better aligned to the wider messaging of the Annual Funding Statement and beyond. TPR has become increasingly vocal in confirming it supports a wide range of suitable endgames for schemes. It clearly sees scope for a range of solutions to play an important role in the pensions landscape to support positive outcomes for members and other stakeholders.
“This is clear from the deliberate inclusion within this guidance of references to the wider capital backed solutions that do not meet the definition of a superfund. Whilst we expect TPR to take a cautious approach here we believe it is crucial that TPR demonstrates an openness to innovation if it is serious to encourage a range of commercial providers to make available new solutions. With this in mind, we welcome the sentiment that invites stakeholders to engage with TPR where there is a strong belief that deviating from the central guidance leads to much better outcomes. Schemes backed by a distressed sponsor that cannot quite afford to transact with a superfund, could benefit from this.
“Whilst we look forward to the day when superfund legislation is passed, that does not feel imminent as we wait for the pensions review from the new Labour government. We therefore expect the market to operate under the latest form of guidance for some time. Whilst the perimeters of that review are unknown, this guidance looks to tick all the boxes from the prior signalling from Labour, which has emphasised a desire for consolidation among pension schemes and the pursuit of policies that support the wider pro-growth agenda.
“We support this policy ambition, and echo TPR’s sentiment that superfunds can have a clear and active role in the market. Consolidation, however achieved, can play a vital role within our industry to drive efficiency and positive outcomes for members and sponsors alike.”
Cardano Advisory managing director Adolfo Aponte says: “Today TPR reaffirmed its support for industry innovation that accelerates the pace at which the DB pension fund market consolidates.
“Allowing a superfund to distribute returns to its investors should improve pricing for pension funds, while also making the structure more appealing to a wider range of investors. Encouraging more providers into this burgeoning market will strengthen the overall proposition.
“This step will bring superfunds more in line with insurers, many of whom regularly pay dividends to their shareholders. But we see the guardrails established by TPR today as the bare minimum requirement. Robust governance and controls, as well as a clear strategic vision will be key to ensuring the policy does not end up exposing the security of members’ benefits.
Aponte adds: “The Regulator has also seen merit in relaxing the capital requirement for capital backed providers looking to rescue pension funds from the Pension Protection Fund (PPF). TPR is effectively giving trustees more tools to manage employer insolvency risk. Yet with the number of cases entering PPF assessment at record lows, my sense is this move could actually end up supporting the contingency plans that enable trustees to run-on the obligations.
“Building on two successful superfund transactions over recent months, TPR’s announcement is further evidence that alternative risk transfer structures are growing up.”
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