The Pensions Regulator (TPR) has updated its guidance on defined benefits (DB) superfunds, prompting industry experts to call the move a “crucial market milestone” that confirms the regulator’s support for a wider range of endgames.
TPR said the guidance update would entice more providers into the superfunds market, boost innovation and ensure that savers benefit.
The use of superfunds for pensions is relatively new in the UK market, with the Sears Retail Pension Scheme being the first scheme to transfer its 9,600 members to a UK pension superfund in 2023.
Superfunds enable the consolidation of private DB schemes into a collective scheme to take advantage of economies of scale. They also enable the original pension scheme sponsors (often employers) to transfer the risk of pension liabilities to the superfund, while ensuring members benefits are paid. These funds are intended to provide scheme members with secure retirement benefits by using professional management and are subject to rigorous regulatory oversight.
Updated guidance
Now, updated guidance from TPR allows DB superfunds to release capital up to twice a year, when the fund meets a specific trigger and safeguards.
Nina Blackett, interim executive director of strategy, policy and analysis at TPR, said: “The introduction of capital release will make it more attractive for providers to enter the market because it will enable surplus above a healthy funding level to be taken ahead of buyout. The inclusion of superfunds in the new pension schemes bill should provide confidence to potential market participants.”
Insolvent employers
TPR said it had listened to the pensions industry concerning the role of superfunds and capital backed arrangements (CBA) in cases where schemes’ employers have become insolvent. In such cases, pension trustees may decide to enter into a CBA or superfund on a reduced capital adequacy basis where the alternative is for the scheme to buy out on less than full benefits.
Blackett said: “We expect superfunds and CBAs to increase as the DB market consolidates. We strongly support innovation in the interests of savers, and in updating the guidance we have worked closely with industry.”
Iain Pearce, head of alternative risk transfer solutions at Hymans Robertson, called the updated guidance “a crucial milestone”.
He said: “To date, TPR’s interim guidance has not allowed providers to generate ongoing returns from successfully managing the risks within a superfund. This has effectively restricted commercial superfund models to temporary “bridge to insurance” models, as seen in the first two Clara transactions [one of which was the £590 million transaction between Clara-Pensions and Sears Retail Pension Scheme]. Critically, as part of the transaction, Clara provided £30m of new capital.”
Scheme endgames
Pearce said: “Having closely scrutinised the Clara structure and those two transactions, this latest evolution in the guidance is less restrictive and signals that the superfund market is truly open for business and innovation.”
He said that following TPR’s understandably cautious approach when first developing this market, the updated guidance is now better aligned to the wider messaging of the annual funding statement and beyond.
“TPR has become increasingly vocal in confirming it supports a wide range of suitable endgames for schemes. This is clear from the deliberate inclusion within this guidance of references to the wider capital backed solutions that do not meet the definition of a superfund. While we expect TPR to take a cautious approach here, we believe it is crucial that TPR demonstrates an openness to innovation if it is serious about encouraging a range of commercial providers to make new solutions available.”
Schemes backed by a distressed pension sponsor that cannot quite afford to transact with a superfund could benefit from this, he added.
Consolidation vital
However, Pearce also said that while he looked forward to the day when superfund legislation is passed, it does not feel imminent as the industry waits for the pensions review from the new Labour government.
He added that while the perimeters of the pension review are unknown, this guidance “looks to tick all the boxes from the prior signalling from Labour, which has emphasised a desire for consolidation among pension schemes and the pursuit of policies that support the wider pro-growth agenda”.
He said: “We support this policy ambition, and echo TPR’s sentiment that superfunds can have a clear and active role in the market. Consolidation, however achieved, can play a vital role within our industry to drive efficiency and positive outcomes for members and sponsors alike.”
Market confidence
Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association (PLSA) said the inclusion of DB superfunds in the new pension schemes bill should provide confidence to potential market participants.
“We have said for some time that, to ensure that the final DB superfund regime offers at least the same level of protection to scheme members as the DB funding regime, the government should proceed quickly with finalising the DB superfunds legislation it consulted on back in 2020.
“The release of this latest DB superfund guidance is a strong indication that the regulator supports a wide range of suitable endgames for schemes, which is consistent with the PLSA’s view that trustees should have a full range of endgame options available to them.”
