The pensions industry has broadly welcomed the introduction of a long-awaited regulatory regime for the pension superfund market by The Pensions Regulator (TPR), although further clarity was called for.

TPR today (18 June) published the details of the interim regime for prospective defined benefit (DB) pension consolidation vehicles today, emphasising the “high bar” set for emerging superfunds.

This is an approach that has been “commended” by emerging superfunds themselves, with The Pension Superfund CEO, Luke Webster, stating the whilst TPR has taken a “hard stance on security”, this is will ensure that superfunds provide a “gold plated solution to the market” and that members remain “extremely safe”.

The focus on member security has been noted by many industry experts, with Dalriada Trustees trustee, Charles Ward, adding: "As trustees, the security of our own members' benefits is front and centre of all we do.

“It is encouraging to see governance requirements and financial standards being put in place, both of which suggest that these funds will need to be committed for the long term and managed in a prudent way.

“However, the range of schemes for which a superfund is appropriate is likely to be narrow given the prohibition on transfers for well-funded schemes (within five years of the
"gold standard" insurance company buyout) and the difficulty that weaker employers will have in finding collateral to contribute to their scheme, even if this is less than the buyout deficit."

Pensions Management Institute (PMI) president, Lesley Carline, also warned that whilst TPR has made “no secret of its concerns about the standards of governance associated with small legacy DB schemes”, it should avoid “thwart[ing]” its own objectives by creating a regulatory culture which could "disincentivise the creation of consolidators".

She added: “Whilst safeguarding members’ benefits is an obvious priority, this should not be allowed to prevent commercial organisations from being sufficiently profitable.

“Consolidators should be able to remunerate investors without undue regulatory restriction if the superfund concept is to succeed. We believe this aspect of today’s announcement requires further clarification.”

However, Webster also highlighted the “fortunate” timing of the regime, stating that as well as the security for members, which is “more essential then ever”, it is also the case that “we never needed the growth of British business more than current times".

He emphasised that freeing companies up to focus on delivering growth is going to be “to the benefit of all society”, with a number of industry experts have echoing this sentiment to highlight the potential benefits for sponsoring employers and schemes alike.

This was also highlighted by Hogan Lovells pensions team partner, Duncan Buchanan, who stated: "I expect a number of my clients will be keen to investigate moving their pension schemes to a superfund so they can focus on their businesses free of historic pension liabilities that consume significant management time and expense. "

Buchanan emphasised that trustees looking to agree to transfer to a superfund must take "specific legal and covenant advice" to ensure that transfer would be beneficial for their members and an insured buyout is beyond reach.

He added however that the involvement of TPR in both the transfer process (requiring formal clearance) and the ongoing supervision of superfunds will "definitely assist trustees and should give reassurance to the transferring members".

Society of Pension Professionals president, James Riley, added: “More than anything, I hope that this will result in better outcomes for pension scheme members, particularly where the sponsor is struggling at the current time as a result of Covid-19.”

He warned however, that pensions consolidation isn’t “just about superfunds and the separation of the employer covenant”, highlighting that operational consolidation of schemes, leading to economies of scale and improved governance, can also “significantly improve member outcomes”.

TPT Retirement Solutions business development director, Paul Murphy, agreed, stating that the current crisis will likely see a greater demand for the consolidation of DB pension schemes, as sponsors and trustees look to benefit from these economies of scale, such as cost effective access to more efficient investment strategies.

He warned: “Any consolidation vehicle, however, must be carefully regulated to provide sponsors and trustees with the necessary legislative confidence, so in that respect, today’s announcement is helpful but caution must still prevail as these products remain untested and sponsors and trustees will still need to satisfy themselves of their suitability.”

Agreeing, LCP head of corporate consulting, Gordon Watchorn, noted that, considering the “significant challenges” facing many sponsors amid the pandemic, superfunds may now offer a” real option” for schemes that are unable to reach buyout in the near term.

He explained: “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 buyout 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 new frameworks set 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”.

Indeed, despite some concerns persisting, the industry has broadly hailed the regime as progress, with Watchorn describing the announcement as a “major step towards opening up the superfund market after years of stalemate".

Webster added that whilst a timelier response from central government to the original consultation would have been ideal, there are “many competing legislative priorities at the moment”.

“The important thing is to have a framework that trustees can use to take their decisions, and that the regulator can establish an effective regime of supervision through. If this does that, then that’s fantastic and we’ll be following the finalisation of legislation closely,” he concluded.

Furthermore, XPS Pensions head of risk transfer, Harry Harper, who described the regime as a “sea change in the risk transfer market”, added that the regime would “increase options” for schemes with stressed employers and on corporate transactions where locking down pensions costs can support activity.

He added: “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.”

Lincoln Pensions managing director, Adolfo Aponte, on the other hand, stated: “The drive towards greater innovation comes at a time when employer covenants and funding levels are being challenged by myriad factors, not least Covid-19, so this has to be done cautiously.

"We expect today’s guidance to open the flood gates on the sale of the employer covenant links in exchange for a defined pot of capital, which could be transformational in the way that benefits are secured and how they are delivered to members.

"As with any innovation however, there is ample room for unintended consequences and the emerging regulatory regime should ensure members are not left wearing the innovation risk.”

TPR were also commended on their “rigorous” consultation process, with Webster highlighting the process as “a good example of regulators engaging with industry generally”.

PLSA head of DB, LGPS, and standards, Joe Dabrowski, added: “It is great to see the Department for Work and Pensions taking forward the superfund concept, which was one of the key recommendations of the PLSA’s DB Taskforce and the government’s White Paper.

“TPR has clearly given a great deal of thought to create an appropriate and affordable supervisory regime, which protects members and the PPF.

“Under strong governance and robust capital buffers, superfunds have the potential to strengthen the security of the millions of savers in DB schemes whose sponsoring employers face an uncertain future.”

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