The Pensions Regulator has published new guidance for defined benefit schemes transferring into a commercial consolidation 'superfund', placing the burden of proof on trustees to show that their plan is in members' best interests.
The new guidance, published on Wednesday, specifies that trustees of interested schemes should first demonstrate to the regulator how the move accords with a set of "gateway principles" before transferring into a superfund.
There are three gateway principles in total, based on the consultation into this area by the Department for Work and Pensions earlier this year.
Sponsors and trustees should be considering all consolidation options available to them and not be swayed by the allure of headlines in relation to superfunds
Sean Gilfeather, TPT Retirement Solutions
First, transfers to superfunds should only be considered if the scheme “cannot afford to buy out now”. The second gateway principle is “if a scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer”.
Third, a transfer to the chosen superfund “must improve the likelihood of members receiving full benefits".
“We expect trustees to conduct this assessment, supported by the sponsoring employer. This will require trustees and employers to work closely, and collaborate to achieve the best outcome for members,” the guidance states.
While trustees may “take some comfort” from the regulator’s own assessment of superfunds, according to the guidance, it reiterates the need for trustees to carry out their own extensive due diligence before coming to any decision.
Charles Ward, a professional trustee at Dalriada Trustees, welcomed the new guidance, “which allows continued innovation in the consolidation and settlement market”.
“The guidance itself contains few surprises, with the focus being on the 'gateway tests' previously trailed by TPR,” he said.
“If buyout isn't an option, now or in the future, then the focus is rightly on the likelihood of a better outcome for members after transferring to a superfund. While the guidance does advocate a proportionate approach to assessing this, based on the resources available to the scheme and taking into account the work already done by TPR on superfund strength, it will require detailed modelling of the interaction between future investment and covenant risks.”
However, he added, smaller schemes will find accessing this advice prohibitively expensive, “which could close off this option to them".
"We are also encouraged to see specific guidance for superfund, and similar, solutions that do not sever the link to the employer but do provide additional capital support to the scheme," he said.
Some observers sounded a note of caution, however. Sean Gilfeather, director of strategic partnerships at TPT Retirement Solutions, a master trust and competitor of the superfunds, said the guidance does not “highlight the fact that both sponsors and trustees should be considering all consolidation options available to them and not be swayed by the allure of headlines in relation to superfunds.”
“Can trustees be really confident that superfunds are the right option for their members, given they are untested? And how will covenant strength and [Pension Protection Fund] eligibility be affected? These are particularly crucial considerations at this time of great economic and political uncertainty,” he continued.
“[There are] still too many unknowns in relation to superfunds, and stringent due diligence should be carried out on all consolidation options before making this significant and potentially irreversible decision.”
Partial transfers
The regulator's guidance has cleared the way to partial transfers into a superfund. Partial transfers involve the transfer only of a defined group of members to a superfund, and may occur where a scheme is not able to buy out all members’ full benefits with an insurer or transfer all members to a superfund.
The move was welcomed by Alistair Russell-Smith, head of corporate DB at Hymans Robertson, who said: “It is good to see the guidance open the door to partial transfers, where for example a scheme insures its pensioners and transfers its deferreds to a superfund. Having an ability to split schemes in this way is likely to be useful. The way the capital requirements for superfunds have been defined means their pricing will be more favourable for deferreds, and may even be more expensive than insurance for pensioners.”
However, the regulator acknowledged that while the aim of any transfer to a superfund should be to improve the likelihood of all members receiving their benefits in full, in the case of partial transfers “there might not be the same level of improvement for all members. The trustees should consider the options available to them and be able to explain why a partial transfer is the best option in the circumstances of their scheme.”
“This is a complex area, and trustees should consider taking legal advice in relation to their duties to their members when treating groups of members differently,” the guidance states.
Guidance no substitute for legislation
Speaking to Pensions Expert in June, Rob Yuille, head of long-term savings at the Association of British Insurers, said he was “disappointed” with TPR’s interim superfunds regime. He argued at the time that it seemed to hold superfunds to lower standards than traditional insurers are held to, potentially posing a risk to savers as “it’s not clear to trustees how secure superfunds are, either compared with other superfund [models] or with buyouts with insurers”.
BoE governor reignites row between superfunds, insurers and regulators
In an intervention that laid bare a deep divide both in the industry and between regulators, Bank of England governor Andrew Bailey has reignited a long-running feud between traditional insurers and advocates of new superfund models, while casting doubt on the Pensions Regulator’s ability to oversee consolidators.
Of the newly published guidance, he said: “TPR is right to expect extensive due diligence by trustees, but it is no replacement for legislation. Trustees of schemes have one shot at severing the employee covenant, so they need to get it right and ensure scheme members are front and centre of any decision. As it stands the guidance is part of a regulatory regime which is not strong enough; legislation is needed as soon as possible.”
