The Pensions Regulator (TPR) has published updated defined benefit (DB) superfund guidance, including on capital-backed arrangements (CBA) and its expectations for the release of capital.

Its updated guidance stated that capital can be released from DB superfunds up to twice a year, and when meeting a specific trigger and safeguards.

TPR said it “listened closely” to the industry regarding capital release, and that its position in the guidance supported innovation while retaining protection for scheme members.

Its guidance also stated that trustees can decide to enter into a CBA or superfund on a reduced capital adequacy basis, where the alternative is for the scheme to buy out on less than full benefits.

“We expect superfunds and CBAs to increase as the DB market consolidates,” commented TPR interim executive director of strategy, policy and analysis, Nina Blackett.

“We strongly support innovation in the interests of savers, and in updating the guidance we have worked closely with industry.

“The introduction of capital release will make it more attractive for providers to enter the market because it will enable surplus above a healthy funding level to be taken ahead of buyout.

“The inclusion of superfunds in the new Pension Schemes Bill should provide confidence to potential market participants.”

Hymans Robertson head of alternative risk transfer solutions, Iain Pearce, welcomed the updated guidance and described it as a “crucial milestone” in the industry.

“To date, TPR’s interim guidance has not allowed providers to generate ongoing returns from successfully managing the risks within a superfund,” Pearce continued.

“This has effectively restricted commercial superfund models to temporary ‘bridge to insurance’ models, as seen in the first two Clara transactions. Having closely scrutinised the Clara structure and those two transactions, this latest evolution in the guidance is less restrictive and signals that the superfund market is truly open for business and innovation.

“Having perhaps understandably taken a cautious approach for the first steps in the development of this market, TPR’s guidance is now better aligned to the wider messaging of the Annual Funding Statement and beyond.

“TPR has become increasingly vocal in confirming it supports a wide range of suitable endgames for schemes. It clearly sees scope for a range of solutions to play an important role in the pensions landscape to support positive outcomes for members and other stakeholders.

“This is clear from the deliberate inclusion within this guidance of references to the wider capital-backed solutions that do not meet the definition of a superfund. Whilst we expect TPR to take a cautious approach here we believe it is crucial that TPR demonstrates an openness to innovation if it is serious to encourage a range of commercial providers to make available new solutions.

“With this in mind, we welcome the sentiment that invites stakeholders to engage with TPR where there is a strong belief that deviating from the central guidance leads to much better outcomes. Schemes backed by a distressed sponsor that cannot quite afford to transact with a superfund, could benefit from this.”

XPS Group senior consultant and head of alternative de-risking, Patrick Lloyd, added: “More clarity on DB superfunds is helpful at a time when trustees and sponsors of many DB pension schemes are considering their end-game strategies.

"The recent Clara transactions demonstrated a viable endgame alternative for trustees and sponsors looking to deliver better outcomes for members and the new DB superfund guidance will enable more flexibility around how this is provided and potentially widens the universe of schemes who might now consider these solutions.”

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