By David Walmsley, Director of Trusteeship, Administration & DB Supervision at TPR
Clara is the first superfund to meet the benchmarks of our assessment process. Clara now has over 20,000 savers and assets of circa £1.5 billion, providing high levels of funding for the schemes plus access to contingent capital.
The superfunds market is growing. It is clear the superfunds model works, if all the tests are met. And as a regulator we are serious in our support for innovation that benefits savers. We estimate that at the end of 2024, approximately 40% of DB schemes could potentially have met the “Gateway tests 1 and 2” and could consider whether a transfer to a superfund was in their members’ best interests.
These schemes are reliant on their employer to underwrite future funding and investment risks and by transferring to a superfund could replace that reliance with higher funding and/or financial capital. Of those 40% of schemes, around 1,400 had less than £100 million assets and 900 less than £25 million assets.
Smaller schemes are more likely to particularly benefit from improved governance and access to investment and risk management opportunities that may otherwise be out of reach, as well as economies of scale in running costs. We see DB consolidation, whether in a superfund or more conventional master trust, as a positive for ensuring good outcomes for savers in such schemes.
But the superfund market needs scale to take on small schemes and we hope the upcoming Pensions Schemes Bill – which will establish a permanent legislative framework for them – will provide impetus for further innovation and expansion.
We are working closely with Government as it develops the detail of the superfunds policy and forthcoming legislation. In the meantime, to help the market to gain scale, the transaction chain needs to run as smoothly as possible. We have reflected on our experience of the first three transactions and the wider market and have noticed some friction points.
A persistent theme is uncertainty, indeed some misconceptions, about what we need from trustees and employers. Some familiarity with our expectations of those considering transferring to a superfund is needed in what follows so having our guidance for DB superfunds and DB superfunds guidance for trustees and employers to hand may be helpful.
Gateway Test 1 – buyout cost
You do not need to obtain a buyout quote from the insurance market for the purpose of determining whether buyout is affordable. An objective estimate of the cost of executing a buyout from an actuary with experience of the market will suffice.
Diligence on superfunds
We will have scrutinised the legal and governance structure, systems and processes and key people of all superfunds listed on our website. We would not be concerned if you decide to carry out minimal diligence on these aspects.
Rationale for transferring
You will need a thorough understanding of the superfund’s business model and transaction specifics such as:
cash injections
capitalisation
any continuing involvement of the employer (e.g. as guarantor) under so-called ‘connected covenant’ arrangements
how any ‘surplus’ will be distributed
You must provide a comprehensive rationale for transferring, including supporting advice and evidence. This should set out why transferring is in members’ interests and the pros and cons (be transparent, rarely will there be none). Member option terms such as commutation may be relevant considerations.
A strong rationale is vital where the scheme has on-going employer support (as for Wates), but it is a misconception that we will not provide clearance in these circumstances.
Gateway Test 3 – Transfer improves likelihood of full benefits
We recognise this is a matter of judgement, particularly where a key factor is the ability of the employer to support the scheme outside the superfund. Therefore, we do not necessarily expect mathematical quantification of likelihoods.
Stochastic asset-liability modelling, possibly with some modelling of employer insolvency risk and recoveries, may have a part to play, where it is proportionate, but is not a prerequisite.
Bulk transfer terms
The terms of a transfer, including cash injections from employer and superfund, are often struck based on the financial position of the scheme months before the date of transfer.
To make it highly likely that our capitalisation expectations are met at transfer, even if market conditions change, we see clauses in transfer agreements that trigger the terms to be reassessed if key yields move outside pre-agreed corridors (so-called ‘boundary conditions’).
We have listened to feedback that continuing boundary conditions right up to the date of transfer is impracticable. We accept that there comes a time when all parties must commit. In practice, we would unlikely be concerned if boundary conditions terminate on the date members are notified of the pending transfer (normally 30 days in advance). We will, however, ask you to explain why you are comfortable with this.
How to find out more
Watch out for our forthcoming ‘Defined Benefit Scheme Endgame Options Guidance’ which will explore the wider range of options available in 2025 for DB schemes. If you are at a stage where you are seriously considering a transfer to a superfund, we encourage you to engage with us by contacting SuperfundTransfers@tpr.gov.uk
If you are considering entering the superfund market as a provider, please contact us for an early conversation at authorisationteammailbox@tpr.gov.uk.
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