Willis Towers Watson (WTW) has said that UK pension lawyers overwhelmingly believe that superfund transfers will become a strong consideration for defined benefit (DB) pension schemes with weak sponsors, as an alternative to the Pension Protection Fund (PPF) or an insurer led buy-out of liabilities.
The consultancy surveyed 11 top pension law firms in the UK, with nine indicating they believed trustees should dedicate time to considering a ‘Plan B’ should their sponsoring employer weaken or fail.
This view reflected some trustees’ concerns around increased sponsor covenant issues resulting from the coronavirus pandemic and economic outlook, WTW noted.
In the survey, all of the legal firms indicated they also believed that superfunds should have a big role to play in trustees’ contingency plans, if and when they receive approval from the pensions regulator (TPR).
An interim regime has been in place for DB superfunds since last June, but none have made it onto TPR’s clearance list so far.
Ian Aley, head of pension risk transfer at WTW, said the PPF was a highly-valued safety net in the UK, but many trustees were surprised at the haircut to benefits different members may receive in the event of a scheme entering the lifeboat fund.
“This is because trustees typically consider funding on an aggregate basis and even for schemes that have a headline funding position of over 100% funded on a PPF basis, the average pension benefits in value terms for someone aged between say, 50-55, can sometimes be as low as 60-70% of full benefits – much lower than some trustees might have imagined,” he said.
“After several years of scrutiny, the industry may finally have a strong contender as an alternative to a PPF+ buyout, which could deliver materially improved outcomes for members.”
According to WTW, the surveyed legal experts were split on whether schemes with insolvent sponsors should jump straight into running themselves as a “Scheme Without a Substantive Sponsor” (SWOSS) if they believed that to be the best course of action, or whether they should enter into assessment by the PPF first before making a decision.
Four experts thought that trustees should be able to establish a SWOSS mechanism straight away, two believed they should enter PPF assessment first and nearly half (five) were unsure.
For schemes where employer insolvency was not expected but could not be ruled out, most of the legal experts (nine) thought that schemes would benefit from consulting with TPR first, before making any firm contingency plans.
“It’s clear that where there is increased uncertainty over sponsor security, contingency planning for financial shocks is as important as ever for pension schemes,” said Aley.
“If it became necessary to act then mobilising quickly and effectively can have real benefits for the long term security of the scheme and its members.”