Pension lawyers support superfunds as ‘Plan B’ for DB schemes

According to a survey of 11 pension law firms by Willis Towers Watson, nine of the respondents believe that trustees should dedicate time to considering a ‘Plan B’ should their sponsoring employer weaken or fail. 

The consultancy stated that this view reflects “some trustee’s concerns” around increased sponsor covenant issues resulting from the Covid-19 pandemic and economic outlook. 

All of the legal firms questioned also stated that superfunds should have a big role to play in those contingency plans, if and when they receive approval from the Pensions Regulator.

The Department for Work and Pensions intends to set out its “vision” for the future regulation of superfunds in autumn/winter this year, according to its annual report published in July.

Superfunds were absent from the Pension Schemes Act, and the industry has been awaiting further legislation in this area for some time. 

In May, TPR listed superfunds in the first year’s agenda of its three-year plan, saying its first-year priorities in this area will be to “continue to assess superfunds wishing to enter the market against our guidance to manage risks and seek to ensure savers are protected in the period before specific legislation is in place”.

Ian Aley, head of pension risk transfer at WTW, noted that while the PPF is a highly valued safety net, “when we show trustee boards the impact on benefits at an individual member levelin the event of entering the PPF, many trustees are surprised at the haircut to benefits different members may receive”. 

He said: “This is because trustees typically consider funding on an aggregate basis, and even for schemes that have a headline funding position of over 100 per cent funded on a PPF basis, the average pension benefits in value terms for someone aged between, say, 50-55 can sometimes be as low as 60-70 per cent of full benefits — much lower than some trustees might have imagined.

“After several years of scrutiny, the industry may finally have a strong contender as an alternative to a PPF+ buyout, which could deliver materially improved outcomes for members.”

Legal experts were split on whether schemes with insolvent sponsors should jump straight into running as a scheme without a substantive sponsor, known as zombie schemes, if they believe that to be the best course of action, or whether they should enter into assessment by the pensions lifeboat first before making a decision.

Four experts thought that trustees should be able to establish a Swoss mechanism straight away, two believed they should enter PPF assessment first, and nearly half (five) were unsure, the survey showed.

For schemes where employer insolvency was not expected but could not be ruled out, most of the legal experts (nine) thought that schemes would benefit from consulting with the regulator first before making any firm contingency plans, with most citing TPR’s experience in this area as being beneficial, WTW stated.

Aley said: “It’s clear that where there is increased uncertainty over sponsor security, contingency planning for financial shocks is as important as ever for pension schemes.

“If it became necessary to act then mobilising quickly and effectively can have real benefits for the long-term security of the scheme and its members.”