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tPR’s interim regime for superfunds


On 18 June 2020 the Pensions Regulator (tPR) released its interim guidance relating to the consolidation of defined benefit (DB) pension schemes into so-called pension superfunds.

Proponents of pension superfunds suggest that superfunds could provide a viable, affordable way for employers and schemes to sever their ties, while the schemes could make significant savings through consolidation compared to a more traditional buy-out arrangement. There remains however some scepticism around the risk to pension scheme members, who may be offered more security through a buy-out with an insurer.

tPR’s guidance, which takes effect immediately, sets an interim framework for authorising the superfund vehicles and subsequent transactions prior to firm legislation being put in place by the Department for Work and Pensions.

The guidance details how superfunds will operate and the steps tPR has taken to address the concerns that have been raised, particularly focusing on governance and ensuring that the superfunds are backed by sufficient capital in order to protect members’ benefits with a high degree of certainty. It is clear that its focus is on minimising any risk posed to scheme members and the Pension Protection Fund (PPF).

What is a superfund?

Superfunds provide a vehicle for sponsors to cease their obligations to their DB pension schemes by transferring the scheme’s assets and liabilities across to a third party.  Previously this was only really achievable by buying-out the scheme’s liabilities with an insurance company. Under most arrangements this will be a structure which combines the liabilities of a number of separate DB pension schemes into one consolidated scheme. The benefits payable from the new arrangement will be backed by a buffer created by an additional cash injection from the original scheme’s sponsor along with investor capital. The buffer acts as a proxy to the original employer covenant.

The superfund will have its own governance and administration functions as well as its own board of trustees.

Key personnel

tPR will need to satisfy itself that the key people running the superfund have the right level of competence, experience and integrity to take responsibility for protecting the interests of members.

An in-depth review of numerous function holders (e.g. CEO, CFO, Chairs of internal committees) will be carried out. This will include the superfund providing information on the relevant individuals such as employment history, professional qualifications and experience.

Governance and administration

As expected, many of the governance requirements on superfunds follow those in place for current pension schemes. The trustee board of each superfund will be required to demonstrate that they have identified any conflicts of interest and provide tPR with evidence of the trustees’ competence and experience, along with information regarding transparency of trustee appointments and robust risk management practices.

tPR has also confirmed that it will assess the IT administration functions used by each superfund. The superfund will be required to outline a process for how further schemes can join the superfund at a later date, along with how it will process member events such as retirements and deaths, with a clear and easily accessible complaints procedure.

Financial sustainability

In addition to requirements surrounding the corporate entity and running of the superfund, tPR has detailed the level of capital buffer required to set up the superfund and how the value of the initial capital will be determined.

The level of capital required to start the superfund will be calculated on a largely prescribed technical provisions (TPs) basis plus a risk-based buffer. tPR has suggested that the risk-based element must be at a level which, when viewed in addition to the superfund assets, will provide a 99% probability of being fully funded on the TPs’ basis within five years.

In order to minimise risk, tPR has confirmed that no surplus value may be extracted and passed to shareholders/investors during the interim period unless the benefits are fully bought-out.

In addition to the above, risks are further mitigated by strict investment guidelines and legally enforced triggers being put in place which will take effect if funding drops below 100% of TPs’ or 105% of PPF’s level benefits.

Investment guidance

The guidance issued by tPR has outlined seven key investment principles which superfunds should adhere to. As expected, some of the principles are already in place for existing pension schemes. In addition, tPR has placed maximum allocations on securities, limits on illiquid assets and has confirmed that any new schemes who join the superfund will be required to transfer their assets to fit in with the superfund’s investment strategy. tPR has confirmed it will monitor superfund investments and take action where it is deemed appropriate.

Next steps

As the government prepares legislation which will write the superfund regime into law, tPR has said that it will monitor the first superfunds and remain prepared to take action if it believes pension scheme members’ benefits are not being sufficiently protected. Although the guidance is in place, tPR seem open to feedback and are willing to make changes where required.

It is our understanding that two providers are in the process of applying for authorisation. Once this is in place, further due-diligence will be required in relation to each transaction. It is therefore likely to be several months before a transaction is completed. We expect many schemes to want to sit and wait to see how the market evolves before deciding whether a superfund is a feasible and appropriate end-game option.

If you would like any further information on superfunds, please speak to your regular point of contact at Quantum Advisory who will be able to assist you.

Danny McGovern

July 2020