The Pensions Regulator ("Regulator") has published new guidance for trustees and employers considering a transaction with a superfund. The full guidance is available on the Regulator's website. This follows on from the guidance framework for DB superfunds that the Regulator issued over the summer. A previous article outlined this earlier guidance, as well as more background information about superfunds.
The Regulator's latest guidance
The new guidance includes the following key points.
1. The "gateway" test is restated. This means that superfunds are only appropriate for pension schemes if:
- they could not afford to buy out benefits with an insurer now and do not have a realistic prospect of being able to do so within the "foreseeable future", which is scheme- and employer-specific but generally considered to be the next five years; and
- the transfer is expected to improve the likelihood of members receiving full benefits.
2. In addition to considering the status quo and the superfund option, trustees should also consider what other options may be available to improve member security. For example, there are other solutions which have some of the advantages of superfunds without breaking the link to the original employer. These include:
- bespoke capital-backed solutions which (like superfunds) involve the use of external capital to provide a buffer and therefore increased covenant strength, but do not involve transferring risk out of the current pension scheme and therefore do not provide the same benefits of consolidation with other schemes; or
- DB master trusts, which do not provide access to external capital, but do provide economies of scale and centralised governance and support by combining multiple schemes.
3. The employer should make a clearance application to the Regulator in respect of a proposed superfund transaction. Additionally, the Regulator encourages trustees and employers to engage with it early in the process.
4. Employers and trustees should both take professional advice in relation to the proposed transaction, and the employer should pay the trustees' advice costs.
5. Trustees should assess their expertise to evaluate the proposed transaction, and consider appointing a professional independent trustee.
6. If the trustees and employers are considering capital-backed solutions which do not involve transferring out of the original pension scheme and do not break the link to the existing employer, the "gateway" principles should still be applied. The guidance contains an appendix with further considerations for such arrangements.
"PPF plus" cases
7. The Regulator notes the particular attraction of superfunds for schemes in PPF assessment. If a scheme has sufficient assets to provide a better outcome than PPF compensation, but insufficient assets to secure benefits in full with an insurer, schemes will have to choose between:
- securing less than full benefits with an insurer - the capital adequacy regime which applies to insurers means that members can be very confident of receiving the benefits that are insured, but those benefits will be less than full scheme benefits; or
- securing full benefits with a superfund, if this can be afforded - this way, members remain entitled to full scheme benefits, but with a lower level of security because superfunds are not subject to the same capital adequacy requirements as insurers (which is why they are less expensive).
8. If a scheme in PPF assessment does not have sufficient assets to secure full benefits with a superfund, the Regulator states it should only secure less than full benefits with a superfund with the consent of the affected members.
Regulator's list of superfunds
9. The Regulator will shortly begin publishing a list of superfunds which have met its expectations, although it has stressed that checking that a superfund appears on the list is a first step - it is not a substitute for trustees carrying out their own due diligence on the superfund.
There are no major surprises in this guidance, which builds upon principles the Regulator has already established in the guidance it published in June 2020. However, its existence will help trustees and employers to ensure that their approach is in line with what the Regulator would expect. The fact that the Regulator expects to be involved early in the process may also add some protection and reassurance for those trustees and employers which are involved in the early deals.
Regarding the "gateway", this is broadly consistent with what the Regulator has said before, and with the gateway test in the Department for Work and Pensions consultation on superfund regulation, but it is helpful that there is more explicit recognition that the "foreseeable future" is scheme-specific, although the five year period still remains as a general rule.
The most interesting comments are those on "PPF plus" cases. The point about securing reduced benefits with a superfund only if the trustees have obtained member consent is reasonable in view of the current law, but this consent requirement does not arise when securing less than full benefits with an insurer on an insolvent winding-up, and may cause practical problems for trustees. The difference in treatment arises from how the legislation and case law have evolved, and is a point which may need to be reviewed as the statutory regime catches up with the development of superfunds.
Also, the guidance recognises that trustees may have to choose between securing full benefits with a superfund or securing less than full benefits with an insurer, but it does not tell trustees how much (if any) weight they should put on the additional protections offered by the insurance regime when making the comparison. This may leave trustees in a difficult position.
Finally, the guidance also recognises the possibility of partial transfers to superfunds, and the issues thrown up by that.
These difficult issues serve to emphasise the increasing range of options now available to pension scheme trustees. Whilst greater choice and innovation is in the interests of pension scheme members, they do also increase the difficulty of the decisions faced by trustees. Good quality professional advice and a supportive regulator will be essential to achieve the best possible outcome in any given scenario.