DB superfunds – TPR sets a high bar for new consolidation option

TPR has been clear that, before it will even consider clearing any individual transactions, it expects to assess each prospective entrant to the superfund market. This will include understanding the superfund structure, checking key individuals running the superfund are “fit and proper persons”, as well as seeking comfort that there is a strong trustee board in place, with adequate management of conflicts of interest.

Given that TPR has now been in detailed discussions with PSF and Clara for some time, we expect the assessments should conclude shortly, and the first transactions will then begin to be processed.

After a transfer to a superfund, pension scheme liabilities will be backed by both the assets held within the superfund scheme and a separate capital buffer. TPR has been fairly prescriptive about its expected funding levels for superfunds:

• The superfund will initially need to be fully funded (without the capital buffer) on a “technical provisions” basis which is at least as cautious as a set of assumptions specified by TPR.
• The capital buffer will be risk-based (i.e. a higher-risk investment strategy will require more capital to be held) and set at a sufficiently high level that, when combined with the scheme assets, there is a probability of at least 99% that the superfund will be fully funded in five years’ time, alongside a separate longevity buffer.
• There will be “funding triggers” requiring the superfund’s trustees to take certain actions (i.e. either merging the assets from the capital buffer into the scheme, or winding up the superfund), providing protection to members and the PPF in the event of poor performance.

TPR has also set out its expectations for superfunds’ investment strategies. In particular, the capital buffer must be invested in a manner appropriate to a pension scheme, and there will be limits on investment concentration and the holding of illiquid assets.

We expect that trustees of transferring schemes will take comfort from the robust funding and investment arrangements that TPR is requiring the superfunds to adopt and the proposed supervision of superfunds. While this stops short of requiring the superfunds to capitalise to the same level as insurers, in our view these new options should provide a secure alternative for schemes unable to afford an insured buyout. 

TPR is placing restrictions on the ability of superfunds to extract profits from transferring schemes. Other than fees, costs and charges (which must be “appropriate, transparent and fair”), superfunds will not initially be able to withdraw funds from either the scheme or the capital buffer, unless members’ benefits have been secured in full with an insurance company.
This restriction will be in place for the duration of the interim period (i.e. until formal legislation is passed), and will be reviewed within three years if legislation has not been passed by then.

It remains to be seen whether this initial restriction on profit-taking will cause any problems for either of the initial entrants to the superfund market, or dissuade any of the other potential entrants or their investors.  It is important to remember, however, that any stake in a pension vehicle is by definition a long-term investment.

Once the superfunds are up and running, any transaction with an individual scheme will initially be subject to “clearance” from TPR.  Amongst other things, the clearance process will involve TPR inspecting the work that the transferring scheme’s trustees have done to satisfy themselves that the transfer is in their scheme members’ interests, and in particular that a buyout transaction would not otherwise be possible within the forseeable future.

The superfunds will also be expected to provide ongoing monitoring information to TPR, for example in order to confirm that the funding position of the scheme remains healthy and robust to investment market shocks.

Despite the protections offered by TPR’s tough new regime, assessing whether or not a superfund is the right destination for a given pension scheme will not be an easy decision.  Our briefing note sets out in more detail the factors that trustees and sponsoring employers will need to consider before pursuing the superfund option.