Freshfields Bruckhaus Deringer (Freshfields) has outlined legal considerations for pension scheme trustees and employers considering a defined benefit superfund transaction.

In its report, Superfunds: An alternative safe harbour: Pensions consolidators open for business, the firm stated that it would expect superfunds to “continue to face challenges as they begin to do business in earnest”.

It clarified, however, that despite the risks of going into “uncharted territory”, the developments would also open up a “wider range of opportunities” for scheme trustees and sponsors looking to secure member benefits within a foreseeable timeframe.

The firm highlighted several legal issues that would still need to be “carefully considered” by pension scheme trustees and employers, emphasising the importance of seeking independent actuarial, covenant and legal advice to help mitigate risks.

Both pension scheme trustees and employers were urged to “interrogate” the legal integrity of the overall structure of the arrangement, including matters such as the segregated status of the superfund, the details of the investor contribution commitment, and the model for return of capital and profits to shareholders.

Trustees were also encouraged to consider whether the superfund route is an appropriate end-game for the scheme from a trustee duty and employer duty of good faith perspective, and to explore the implications of transferring the plan to the superfund from the perspective of The Pension Regulator's (TPR) moral hazard powers.

Freshfields warned that TPR may look to use a transfer as an opportunity to look-back at the ceding employer’s prior conduct in relation to the plan for the purposes of its moral hazard powers, stating that this seems “a real possibility given statements made by TPR in the guidance”.

Trustees were advised to discuss the potential impact of a transaction on member benefits, as well as whether the member communications and any member consultation process carried out in connection with the transfer creates any legal risk, and how to mitigate this.

The report explained that for trustees, deciding to enter into a superfund would ensure a balance between a typically “long-standing and well-understood" employer relationship and covenant, and a superfund which promises higher security, but which will be "largely unproven for a considerable time to come”.

It clarified that unlike insurers, superfund models are untested, noting that the regulatory environment for them will “inevitably” continue to evolve, with greater scrutiny from The Pensions Regulator (TPR) over time.

The firm emphasised, however, that this close attention from both TPR and the government should give “significant comfort” to many trustees and employers.

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