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Have your say on defined benefits pension superfunds

Paul Brice Paul Brice

The Department for Work and Pensions (DWP) has launched a consultation into the consolidation of defined benefit (DB) pension schemes. It focuses on the requirement for a legislative framework to support effective operation of the proposed superfund consolidation vehicles.

DB pension scheme superfund consolidators gathering momentum

The government’s white paper ‘Protecting defined benefit pension schemes’ issued in March 2018 contributed to this by encouraging consolidation of individual pension schemes.

There are currently two superfund offerings, The Pensions Superfund and Clara. These potentially offer businesses a more efficient way of managing legacy DB pensions for some closed schemes. Both have clearly defined their operational models and intent to receive DB pension scheme transfers as soon as regulation allows. It is expected that other offerings will also soon become publicly marketed.

DWP consultation

The UK government has decided to legislate for an effective regulatory regime that allows these vehicles to operate and benefits members, sponsors, regulators and the wider economy. The DWP has therefore launched a consultation to determine the extent of legislation required, proposing various criteria that would need to be satisfied by each of the stakeholders.

Key principles for trustees

We recommend that the consultation is read in full to understand the detail of the proposals, however, the key principles for trustees are:

  • Trustees will need to be convinced that members’ benefits are more secure in the superfund than remaining with the sponsoring employer
  • Protection will be put in place to ensure that, if insurance buy-out is a viable option within the foreseeable future –termed as around five years – then superfunds cannot be used as a cheaper way to offload liabilities

They are also proposing a requirement that trustees consider the following when assessing the advantages and disadvantages of a move to a superfund:

  • The scheme’s current funding position on a solvency basis. The consultation suggests that to transfer, a scheme may need to be 80% funded on a buyout basis (or around 87.5% on an authorisation basis), after allowing for any additional sponsor top-up, in order to protect the security of the members already in the superfund
  • External professional covenant advice from a regulated provider with a clear conclusion on the employer’s ability to support the scheme for the foreseeable future, including an assessment of the contributions the trustee could reasonably expect to obtain
  • Any deficit reduction contributions due
  • Actuarial advice regarding the future funding of the scheme
  • The funding position and the long term objective of the superfund

Role of The Pensions Regulator

The consultation suggests that The Pensions Regulator (TPR) should not be the decision maker in every superfund transaction. However to allow TPR to use its judgement to determine which transactions to investigate further, the consultation proposes that trustees be required to:

  • notify TPR at the earliest opportunity (at least three months prior) of it’s intention to transfer to a superfund
  • outline to TPR their rational and evidence that transferring to the superfund would enhance member security
  • provide explanation as to why this was not necessary, if professional covenant advice has not been received.

It also states an expectation that employers who are wishing to transfer their scheme to a superfund apply for voluntary clearance from TPR in advance of the transaction.

TPR will produce a new Code of Practice to give trustees practical guidance to help them through the decision process.

Additionally, it has issued guidance for any potential superfund offerings to consider in advance of an authorising regime being set up, and confirmed it will supervise those considering entering the market.

What can we do to help?

The consultation runs until 1 February and the government has provided details of how to respond. If you have any questions about the superfunds concept or the proposals set out in the consultation, or if you think that this is something that could be of potential interest to your scheme, please contact our pensions advisory team.

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