The Pensions Regulator anticipates that it could take five years for the government to put in place a statutory authorisation framework to oversee defined benefit superfunds, as it looks ahead to publishing specific guidance for trustees considering a transfer to the new vehicles.
Speaking at a webinar hosted by law firm Eversheds Sutherland, David Fairs, TPR’s executive director of regulatory policy, analysis and advice, expanded on the reasoning behind its interim regime, explaining that it was drafted with regard to the time it will probably take for a permanent statutory regime to emerge.
Specifically, Mr Fairs said the technical provisions and capital buffer requirements set out in its interim guidance, which require a 99 per cent probability that schemes will be more than 100 per cent funded over a period of five years, were drafted in that way “because we think it may be that long before we see an authorisation regime come into place”.
We’re expecting a number of organisations to have financial difficulties towards the end of this year, and trustees of those pension schemes might be looking at their employer covenant, comparing that with the financial security a superfund can provide
David Fairs, the Pensions Regulator
“We’ve always said our preference is for there to be an authorisation regime, and proper regulations around superfunds,” he said.
“At the moment, we don’t have an authorisation regime or specific regulation that deals with superfunds. At the same time, we have a market that’s developing rapidly. We’re beginning to see some innovative solutions being brought into the marketplace.”
Guidance coming for trustees
The regulator’s next step will be to set out accompanying guidance for trustees.
"We’ll set out very clearly what we think trustees should take into account before they go into a superfund, so it will be very clear to them the amount of due diligence we expect them to do, the levels of understanding they have, the information they should get from the superfund before they enter into a transaction,” Mr Fairs said.
While clarifying that TPR does not consider superfunds as an alternative to a fully insured buyout for those schemes able to afford it, he acknowledged that they are a viable option for schemes unable to afford the cost of a traditional endgame strategy.
He said the economic crisis brought about by coronavirus does not make the case for superfunds stronger, but “it does create greater demands”.
“Clearly, we’re expecting a number of organisations to have financial difficulties towards the end of this year, and trustees of those pension schemes might be looking at their employer covenant, comparing that with the financial security a superfund can provide, and perhaps thinking that may be stronger than I’m seeing from my employer covenant,” he said.
He added there may also be a demand among employers to emerge from the crisis “without the unknown liability that exists because they have a DB scheme”.
Adam Saron, founder of Clara-Pensions, concurred. “It’s an unfortunate reality that the economic effects of Covid-19 have made consolidation a more valuable option — solutions that can provide better outcomes for members and simultaneously reduce the burden on employers are needed,” he said.
Seconding Mr Fairs’ contention that a statutory regime, though welcome, is unlikely to emerge for some considerable time, Mr Saron added: “Consolidation is needed today, and I think it’s wanted today as well. The regulator’s actions in publishing their guidance has delivered much-needed clarity on how we can safely deliver on that promise — or, rather, as soon as we complete our regulatory assessment.”
Some concerns left unaddressed
Pensions Expert reported previously on concerns about the guidance raised by the Association of British Insurers.
ABI assistant director Rob Yuille last month told Pensions Expert he was concerned that the regulator’s interim regime was lighter than the one TPR proposed in October last year, and cited a leaked letter from Bank of England governor Andrew Bailey warning of “regulatory arbitrage” and potential threats to financial stability posed by superfunds.
Lords commit TPR to preserving open DB schemes
The House of Lords has amended the pension schemes bill to ensure that open defined benefit schemes are not forced to derisk their investments in the same way as closed plans, in one of four defeats suffered by the government.
Mr Yuille also highlighted an apparent disconnect between TPR and the Prudential Regulatory Authority, which had previously argued that “there may be unintended consequences if the two types of business are regulated differently”.
Asked to respond to these concerns, Mr Fairs said: “I’m not going to comment on an alleged leak of an alleged letter. We consulted with government, we consulted with other regulators, and they were very supportive of us getting interim guidance into the marketplace, recognising some of the challenges that are there.”
