Gordon Watchorn, partner at LCP said: “These guidelines are an important step on the long and winding road to superfunds. As the guidelines point out, in some cases the comparison with a superfund will be relatively clear cut, especially where the current employer seems unlikely to survive. But there will be many more cases where the decision is more finely balanced and trustees will need to demonstrate they have taken careful advice on the balance of risks associated with different strategies. This will include assessing how scheme funding and sponsor strength are likely to evolve over the next three to five years in order to judge whether a buyout will be a realistic option over that time period. I hope that the publication of these guidelines will pave the way for the first superfund transactions next year and the implementation of an important option for trustees and sponsors looking to do the best for scheme members”.
Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says: “This revised guidance for trustees and employers clearly shows that TPR is committed to superfunds and is supportive of transactions happening ahead of an authorisation regime, and it will be interesting to see the list of their approved superfunds when this is published shortly.
“One key issue for the viability of transactions for smaller schemes is that the frictional costs of getting the right advice to support a transaction do not outweigh the other benefits. It’s therefore helpful that TPR confirms, in this guidance, that trustees can take some comfort from TPR’s own assessment of the superfund. It is also good to see it say that superfunds should provide ceding trustees with a summary of TPR’s assessment. A key judgement for ceding trustees is then the level of their own advice and due diligence that they carry out on top of this, which the guidance suggests, should be proportionate.
“A key principle for a transaction is that buy-out is not realistic in the foreseeable future. It is interesting to see that this timescale has been shorted to an upper limit of 5 years, but with an acknowledgement that it may be appropriate to consider shorter timescales in situations where covenant support is uncertain or fragile. This is presumably in response to Covid-19 impacting on employer covenants, and could now bring more schemes in scope of superfund transactions than had previously been envisaged.
“The clearance application for superfund transactions outlined in the guidance is very wide-ranging and this could risk making the clearance application more onerous than it might have otherwise been. It not only covers the more obvious points around how it improves member security, but also additional ones such as demonstrating why it is better than other forms of consolidation and support from the employer that might be possible, and considering if historic corporate activity had led to detriment to the pension scheme.
“It is good to see the guidance open the door to partial transfers, where for example a scheme insures its pensioners and transfers its deferreds to a superfund. Having an ability to split schemes in this way is likely to be useful. The way the capital requirements for superfunds have been defined means their pricing will be more favourable for deferreds, and may even be more expensive than insurance for pensioners.
“The guidance confirms that PPF+ cases should only consider a superfund if the superfund can provide 100% of benefits. This leaves a relatively small pool of schemes that might be eligible for superfunds after an employer insolvency event, as the scheme needs to be pretty close to fully funded on a buy-out basis to cover 100% of benefits in a superfund. There are some recognised issues with paying less than 100% of benefits in a bulk transfer, but if these could be overcome, it would open up superfunds to a broader range of more poorly funded schemes suffering employer insolvency events.”
Adam Saron, CEO of Clara-Pensions, said: “We welcome this Guidance. It confirms transactions are deliverable and confirms consolidators can ‘offer a secure destination for schemes and members’. The proportionate approach adopted by The Pensions Regulator to reflect scheme and employer circumstances is particularly welcome.
“We look forward to The Pensions Regulator completing their assessment of Clara in the near future and having our first transactions cleared thereafter. In creating a clear framework and checklist of things to consider, we also think this Guidance provides a helpful framework for assessing all risk-transfer activity that trustees and sponsors may undertake.”
Adolfo Aponte, Managing Director at Lincoln Pensions, said: “TPR’s new guidance for superfunds could not have come at a better time. With an increased number of corporates in significant distress, schemes without a realistic prospect of reaching an insurance buyout will now be able to target a more affordable end game solution that is designed to deliver a high standard of protection to pension benefits.”
“We are already working with a number of schemes and sponsors looking for pragmatic solutions that deliver on their pensions promise, but also protect jobs for the current generation of employees that is struggling given this economic backdrop.”
“That said, a superfund transfer will not be the solution for every scheme. Trustees and sponsors will be required to demonstrate, through a regulatory clearance application, that moving to a superfund is in the best interest of members and also meets the three principles of the gateway test.”
“The strength of the existing employer covenant and the value and security a scheme can access through it will be critical to a successful superfund transaction. The covenant assessment will not only need to offer a view about future prospects, but it will also need to assess if the sponsor has taken any action in the past that could have been detrimental to the scheme. This lookback provision could catch corporates by surprise if they have not been carefully managing their pension exposure.”
“While the guidance provides much-needed clarity on the thought process trustees and sponsors will need to go through, expert judgement will be required to support the clearance application. The Regulator stresses the importance of taking independent covenant advice that is consistent across the three principles of the gateway test.”
John Baines, partner in the Risk Settlement team at Aon, said: “We are seeing a shift in the pace of regulatory guidance on superfunds which, in turn, gives confidence to schemes considering this as a viable option. For trustees, the decision on whether to sever the link with a current sponsor in favour of a superfund is likely to be one of the most significant they ever take.
“By reaffirming a decision-making framework, including the regulatory support available, the Pensions Regulator has given clarity to trustees and sponsors who are considering whether this really is a viable solution and is in their members’ best interests.”
Andrew Ward, Partner and Head of risk transfer and DB journey planning at Mercer said: “The range of consolidation and end-game options increasingly resembles a spaghetti junction for trustees and sponsors hoping to navigate their way to security. The gateway guidance will be a helpful A-Z for dealing with some of the practical issues that the various parties have been working through when considering superfunds.
“In particular, the focus on maximising the likelihood of benefits being paid in full is sensible. We believe that by using these principles, a number of schemes will now approach a transaction with more confidence. However, as the guidance makes clear, superfund consolidators are just one destination available when considering how external capital support and investment pooling can improve the security of members’ benefits. Continued innovation in this area is providing more solutions appropriate for different pension schemes, however both trustees and sponsors should keep developing the wider road map to ensure the path they are on is right for their particular situation.”
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