Amanda Latham, Policy and Strategy Lead at Barnett Waddingham, said; “We believe that superfund consolidation vehicles offer a genuine endgame option for schemes where buyout is perhaps out of reach, so we are pleased to see that TPR’s interim regime has been published during the COVID-19 pandemic.
“The guidance will give employers and trustees, who may be facing uncertain outcomes, confidence in the viability of another choice for securing members’ benefits. Trustees considering transferring to a superfund can be confident knowing TPR will be supervising these new arrangements.”
“There are a number of areas where TPR will issue further guidance in the coming months and we look forward to seeing how this market develops, both in terms of transactions starting to take place and seeing more new entrants emerge."
Commenting on TPR’s new interim regime for emerging superfund pension market, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says: “Today’s interim guidance for superfunds from TPR is welcome and should help kickstart the market ahead of a longer term authorisation regime. The main block to commercial consolidators taking off to date has been the delay to the authorisation regime. Whilst there has been a theoretical interim regime in place for 18 months now, transactions have not happened. In part this has been due to nervousness around consistency between the interim regime and where the final regime might land. Furthermore the viability of consolidators is undermined when there is no visibility on the long term authorisation regime.
“The fact that TPR has now issued updated guidance which appears to align with a longer term legislation and authorisation regime suggests TPR and DWP are joined up on the direction of travel. This gives the market far more confidence on the long term viability of consolidators and will provide the impetus that leads to the initial transactions into consolidators.
“This guidance is particularly helpful given that Covid-19 will lead to more corporate insolvencies. Some of the schemes in this situation may now be able to secure a higher level of member benefits than before. PPF+ cases, where a scheme is fully funded on PPF so does not fall into the PPF, but is insufficiently funded to buy-out full benefits, stand to benefit. If they can secure 95p in the £ with a consolidator, or 90p in the £ with an insurer, then trustees need to weigh up the higher benefit level with the lower level of security in a consolidator. This benefit coverage vs security point means there does need to be clear water between consolidator pricing and insurer pricing for consolidators to provide a genuine alternative to insurance. The proposed capital requirements have been set at a level where this looks like this should be achievable, particularly for more immature schemes.
“We welcome the gilts + 0.5% discount rate and intervention trigger being kept under review by TPR. Having a fixed margin above gilts yields is simplistic and could lead to unintended consequences, such as triggering the intervention threshold (which tips all the capital into the scheme) when credit spreads widen for what might be a temporary period. It is also good to see a shift in the long term objective for superfunds from potentially having to target buy-out (one of the options in the DWP consultation) to instead targeting run-off. This will allow a range of superfund models, driving innovation and choice for the market.
“Despite the progress, there appears to be a block on investors extracting value until benefits have been bought out, at least for the first 3 years. If this were to stick longer term, it would seem inconsistent with the capital adequacy proposals, and likely to be problematic for some models. Interestingly the guidance also covers capital backed solutions that do not initially sever the link to the employer covenant at the point that covenant is severed. This may well impact on the structure of new capital backed solutions coming to market.”
Rash Bhabra, Head of Retirement for Willis Towers Watson said: “Superfunds will be a welcome addition to the range of options available to trustees and corporate sponsors for their de-risking journeys.
“Trustees and the Regulator will be determined that superfunds should be a way to improve member security, not to allow sponsoring employers to walk away from their pension obligations on the cheap. Ultimately, trustees need to judge whether members’ benefits will be more secure if they retain recourse to an employer whose prospects are unclear or if they take some cash which might not otherwise be available and rely on the superfund’s capital instead. There will be cases where, on the balance of probabilities, it looks better to twist than to stick. Clearly, this will not include schemes who can see a quick and realistic path to buyout.
“The types of schemes where a superfund could be a viable option include those that are reasonably well-funded, but struggling with a weaker sponsor whose future is uncertain. Superfunds might also appeal where a parent company with no legal obligation to the scheme is prepared to put money in to get the scheme off the group’s books, but not enough to buy the scheme out with an insurer.
“Following COVID-19, some schemes might now have fewer options available to manage risks and meet benefit promises, and so a transfer to a superfund could create materially improved outcomes for their members. The impact of the contracting economy on sponsors could now make the market for superfunds much bigger than it would have been without the pandemic.
“However, whilst superfunds will have a meaningful place as a pension de-risking strategy, trustees and sponsors should be careful about rushing to utilise this option in isolation as there are many alternatives for schemes working with a sponsor with a weakening covenant.
“Should superfunds now demonstrate they can quickly build out from their blueprints into fully functioning and large consolidation vehicles, today’s announcement may herald one of the most significant changes to the defined benefit landscape in recent years.”
Gordon Watchorn, Head of Corporate Consulting at LCP said: “This new guidance is a major step towards opening up the superfund market after years of stalemate. Although it is described as an interim framework, this approach will apply until Parliament has set out its own rules and any such legislation is likely to be several years away. A variety of consolidator models is springing up and it is welcome that the Regulator is looking to have a single, consistent framework for regulating them all. With the significant challenges facing many sponsors in light of COVID 19, superfunds may now offer a real option for some schemes that are unable to reach buyout in the near term.
Whilst the consolidator approach will not be the right answer for all, many sponsors and trustees will wish to give careful consideration to the range of capital-backed solutions, both the existing superfunds and others that are likely to emerge. Insurance buy-out will continue to be the major part of the market as sponsors and trustees will want to go down that route where affordable but the announcement today paves the way forward for the first superfund transactions. The Regulator had to strike a tricky balance between ensuring adequate member security and facilitating a viable market for superfunds. The new frameworks sets a high bar but overall the publication of this new framework is an extremely welcome step and will lead to considerable creativity in tackling the long-term funding challenges of Britain’s DB pension schemes”.
Harry Harper, Head of Risk Transfer at XPS Pensions comments on the news: “The Regulator’s expected announcement is absolutely great news for the consolidators, Clara and The Pension SuperFund and also for the whole pensions market. This brings to an end two years of waiting. We hope what is now being put forward will prove to be a pragmatic, cost effective and usable regime.”
“More broadly superfunds increase options for schemes with stressed employers and on corporate transactions where locking down pensions costs can support activity. Schemes with more deferred pensioners will benefit most from pricing differences with insurers.
“We hope it will drive even further innovation allowing more end game options for schemes. We expect the financial security the Regulator will require will not be as high as that for insurers, but nevertheless can offer a reasonable level of comfort to scheme members.“
“The framework from the Regulator is expected to see them take on responsibility for assessing the financial strength of superfunds as well as regulating, at a broad level, the contract terms and governance of the consolidators, recognising that pension schemes do not usually have the right skills or resources to do this thoroughly themselves.
“The Regulator’s approach should make the cost of transacting more reasonable. While Trustees are not absolved from their own due diligence duties, they now know that the Regulator has been there first and can take a degree of comfort from this. It will be interesting to see what action the insurers now take as we go forward. This marks a sea change in the risk transfer market and enables providers to offer both insurance and non-insurance solutions (or even a combination of the two) and there will doubtlessly be further innovation.”
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