The Pensions Regulator has published new guidance for DB schemes considering consolidation into a new superfund.
The guidance — aimed at trustees and sponsoring companies — stresses that they need to be confident this move is in their members’ interests. It sets out a series of ‘gateway tests’ that must be satisfied before a transfer can take place.
TPR stresses that well-run superfunds have the potential to offer good outcomes for pension savers and employers, but it points out they will not be the solution for all schemes
The new guidance helps schemes understand their options, and ensure they meet the regulator’s expectations.
In June, ahead of proposed government legislation, TPR launched its interim regime for superfunds and other new models to set a high bar for the standards it expects. The regime is designed to help give savers confidence in superfunds, should their pension be transferred into one in the future.
TPR’s executive director of frontline regulation, Nicola Parish says: “We are now providing further details about our expectations of employers and trustees who may be considering the significant step of transferring to a superfund.
“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 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.
Commenting on this new guidance LCP’s head of corporate consulting, Gordon Watchorn says that this guidance sets out a series of ‘gateway tests’. These include being sure that the alternative of a buyout is not possible either immediately or in the ‘foreseeable future’, and also that the transaction improves the chance of member benefits being paid.
Watchorn says: “These guidelines are an important step on the long and winding road to superfunds.
“ As the guidelines point out, in some cases the comparison with a superfund will be relatively clear cut, especially where the current employer seems unlikely to survive.
“But there will be many more cases where the decision is more finely balanced and trustees will need to demonstrate they have taken careful advice on the balance of risks associated with different strategies.
“This will include assessing how scheme funding and sponsor strength are likely to evolve over the next three to five years in order to judge whether a buyout will be a realistic option over that time period. I hope that the publication of these guidelines will pave the way for the first superfund transactions next year and the implementation of an important option for trustees and sponsors looking to do the best for scheme members”.
John Baines, partner in the Risk Settlement team at Aon said this announcement showed a shift in the pace of regulatory guidance on superfunds which, in turn, gives confidence to schemes considering this as a viable option.
He says: “For trustees, the decision on whether to sever the link with a current sponsor in favour of a superfund is likely to be one of the most significant they ever take.
“By reaffirming a decision-making framework, including the regulatory support available, the Pensions Regulator has given clarity to trustees and sponsors who are considering whether this really is a viable solution and is in their members’ best interests.”
Hymans Roberton head of corporate DB Alistair Russell-Smith added: “This revised guidance for trustees and employers clearly shows that TPR is committed to superfunds and is supportive of transactions happening ahead of an authorisation regime. It will be interesting to see the list of their approved superfunds when this is published shortly.
“One key issue for the viability of transactions for smaller schemes is that the frictional costs of getting the right advice to support a transaction do not outweigh the other benefits.
“It’s therefore helpful that TPR confirms, in this guidance, that trustees can take some comfort from TPR’s own assessment of the superfund.”
Lincoln Pensions managing director Adolfo Aponte, Managing Director at Lincoln Pensions, adds: “TPR’s new guidance for superfunds could not have come at a better time. With an increased number of corporates in significant distress, schemes without a realistic prospect of reaching an insurance buyout will now be able to target a more affordable end game solution that is designed to deliver a high standard of protection to pension benefits.”
“We are already working with a number of schemes and sponsors looking for pragmatic solutions that deliver on their pensions promise, but also protect jobs for the current generation of employees that is struggling given this economic backdrop.”
“That said, a superfund transfer will not be the solution for every scheme. Trustees and sponsors will be required to demonstrate, through a regulatory clearance application, that moving to a superfund is in the best interest of members and also meets the three principles of the gateway test.”
He adds: “The strength of the existing employer covenant and the value and security a scheme can access through it will be critical to a successful superfund transaction. The covenant assessment will not only need to offer a view about future prospects, but it will also need to assess if the sponsor has taken any action in the past that could have been detrimental to the scheme. This lookback provision could catch corporates by surprise if they have not been carefully managing their pension exposure.
“While the guidance provides much-needed clarity on the thought process trustees and sponsors will need to go through, expert judgement will be required to support the clearance application. The Regulator stresses the importance of taking independent covenant advice that is consistent across the three principles of the gateway test.”