TPR’s superfund green light is only the start

Although superfunds are already in existence – with transactions waiting in the wings – providers had been waiting anxiously for the publication of TPR’s guidance, which sets out the initial framework for the authorisation and regulation of the sector.

Strictly, pensions legislation in its current form does not prohibit transfers to a superfund. But the omission of superfunds from this year’s pension schemes bill, currently working its way through the House of Lords, had left employers with little comfort that a transfer would not lead to the regulator exercising its moral hazard powers against an employer.

A clearance application does not provide trustees with comfort that a transfer is in accordance with their duties or protect trustees from a later member challenge

The guidance will begin to ease those fears, but does not quite signal a free-for-all for commercial consolidation, with trustees and employers needing to pay careful attention to the watchdog’s requirements.

Employers need clearance

TPR’s interim regime provides an approved route for employers to transfer their DB scheme to a superfund, namely by way of a successful clearance application to an authorised superfund.

The regulator expects employers to apply for clearance before transferring their DB scheme to a superfund, as a transfer is considered to be a new category of clearance Type A event.

Although a well-trodden path, clearance is not a particularly common process for most DB schemes, with the number of clearance applications having dropped significantly since the process was first introduced.

Clearance from the regulator does not amount to approval, but a legally binding assurance that TPR will not use its anti-avoidance powers in relation to the transaction, provided certain conditions are met.

Clearance is not obligatory; however, employers that choose not to seek clearance risk the watchdog exercising its moral hazard powers. The regulator has indicated that it intends to review its clearance guidance, so it may be that the process will become more streamlined and predictable for employers and their advisers.

Clearance does not remove trustee headaches

Superfund transfers are more complicated from a trustee’s perspective. The interim regime raises questions of trustees, as ceding trustees’ due diligence and views will be sought from the regulator as part of a clearance application.

As a clearance application does not provide trustees with comfort that a transfer is in accordance with their duties or protect trustees from a later member challenge, trustees will still need to think carefully about whether the transfer is in their members’ interests.

As TPR’s guidance is currently focused on the requirements for superfunds, it is hoped that further guidance will turn the attention to the difficult question for trustees – however compliant the superfund might be, is it consistent with their duties to make the transfer? 

The regulator considers it inappropriate to clear a transaction involving a superfund until it has assessed the superfund against the relevant criteria.

As a result, the guidance sets out the requirements that a superfund must meet. These include a prescribed prudent set of minimum technical provisions, and other standards reminiscent of TPR’s master trust authorisation regime, including governance and personnel requirements.

Not only are these requirements relevant for superfunds seeking authorisation, but the watchdog has made it clear that trustees should only consider using a superfund once it has completed its assessment.

As there appears to be no fixed timetable for that assessment, it is unclear how long it will take for superfunds to receive the relevant approval.

Changes to come

There is no predetermined timetable for the regulator’s or the government’s next steps in respect of superfund regulation.

Although TPR’s guidance has immediate effect, the regulator notes that there is more detailed guidance to come, in particular in respect of the minimum technical provisions it has set, its monitoring and reporting requirements, and the protections required of superfunds’ legal documentation.

It also flags that it may flex its expectations and change its guidance as new entrants join the market. In short, in the absence of specific legislation, the interim guidance in its current form is far from the final position.

We do not expect specific superfunds legislation to be introduced until next year, at the very earliest, given the current strains on parliament’s time and the omission of superfunds from the current bill. 

Therefore, schemes, superfunds and their advisers will be left to grapple with changing guidance on superfund transfers for some time to come, in the context of a legal regime that has not been adjusted to deal with this development. 

Rosalind Connor is a partner and Aneliese Sweeney is an associate, both at Arc Pensions Law