The UK’s pension regulator has set out its expectations of trustees and sponsoring employers who may be considering transferring to a defined benefit (DB) superfund or similar entity.

The guidance, which was trailed during an industry conference last week, comes on top of that for those running or setting up a superfund, which The Pensions Regulator (TPR) produced in June, and in the absence of a legislative framework.

Today’s publication demonstrates that the various pieces required to enable the first transactions with superfunds to happen are falling into place and that superfunds can be expected to be a permanent and important part of the landscape in future,” said Costas Yiasoumi, senior director at Willis Towers Watson.

“Whereas exploring a superfund transaction may have appeared speculative 18 months ago, that is no longer the case.”

TPR set out three “gateway principles” that transactions with superfunds must meet:

1. A transfer to a superfund should only be considered if the scheme cannot afford to buy out now;

2. A transfer to a superfund should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer; and

3. A transfer to the chosen superfund must improve the likelihood of members receiving full benefits.

“We expect ceding employers to apply for clearance in relation to a transfer from their scheme to a superfund, and for trustees to demonstrate they have done their due diligence in respect of the transfer,” the regulator said.

It also said it did not expect trustees to replicate its assessment of superfunds and that “in carrying out due diligence and considering options for their scheme, we note that ceding trustees will wish to take an approach proportionate to their scheme circumstances”.

Marc Hommel, senior pensions adviser at EY, said the guidance “further signals that the government and pensions regulator are backing employers to access superfunds as more affordable solutions to discharge their pension obligations and, in distressed situations, for trustees to have better options for their members relative to the Pension Protection Fund (PPF)”.

“In the near term, superfund transactions are likely to take place only where the employer is distressed or insolvent,” he added. “Even though there’s huge demand from other employers, the hurdles remain (appropriately) considerable.”

After PPF assessment

Mike Smedly, partner at Isio, saw the guidance “leaving the superfund door wide open in insolvencies where the pension scheme escapes the PPF”, and welcomed this.

“We expect most of the superfund deals in the next six to 12 months will be insolvencies, where trustees will look at superfunds as an alternative to insurance in order to reduce members’ losses.

“A 10% uplift in pensions in return for a little less security might be hard to turn down. For superfunds the current economic woes may well kick-start their growth. From the insurance industry’s perspective, there is still plenty of business to go around but they will lose their monopoly on these ‘PPF plus’ schemes.

“But it’s not all rosy for superfunds as the guidance makes clear that insurance remains the gold standard for those that can afford it.”

For Tim Middleton, head of technical at the Pensions Management Institute ” [w]hat is interesting here is that one DB consolidator sees itself as a bridge to buy-out, and so there is an apparent anomaly over how a scheme might ultimately achieve buy-out via a consolidator but not via the traditional route”. This is a reference to Clara Pensions, one of the two formally established superfunds in addition to The Pension SuperFund.

Neither has yet successfully completed TPR’s assessment process.

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