UK Pensions Regulator publishes DB superfund 'gateway principles' guidance

Out-Law News | 23 Oct 2020 | 9:44 am | 3 min. read

Detailed guidance has been published for pension scheme trustees and sponsoring employers considering transferring the scheme to a defined benefit (DB) 'superfund'.

The eagerly anticipated guidance from The Pensions Regulator (TPR) is aimed at prospective ceding trustees and employers. TPR has also published a summary of the assessment process for DB superfunds; and will follow this with official lists of those superfunds which have been assessed by the regulator and those which are permitted to accept transfers.

A superfund is a model that allows a sponsoring employer to sever its liability to a DB scheme in return for a premium-like payment, dependent on the scheme's funding level. The existing employer covenant is replaced with a special purpose vehicle and fixed capital buffer. The new guidance also covers transfers to superfunds where there is no immediate severance of employer liability. TPR set out details of an interim regulatory regime for such transfers in June ahead of government legislation, which is expected as part of a second Pension Schemes Bill this parliament.

Jones Michael_August 2020

Michael Jones

Legal Director, Pensions & Long-Term Savings

The focus on employer insolvency risk reflects the market perception that initial transactions will be focussed around schemes with weakening covenants at risk of entering the PPF.

Nicola Parish, TPR's executive director of frontline regulation, said: "Trustees need to ensure they are confident a superfund is the right option for their members, the transaction meets the gateway principles and only consider using a superfund named on the TPR website".

"We know that some employers and trustees are keen to explore whether a superfund could provide another option for their DB scheme and for employers allow them to focus on future sustainability. However, while we await government legislation, we are determined to protect savers who may be moved into a superfund by rigorously assessing providers and then supervising them closely," she said.

Under the guidance, ceding trustees and employers will only be able to transfer to a superfund if this is in the best interests of members. The transfer must also meet three 'gateway principles': that the scheme cannot afford a traditional insurance-backed buy-out now; that the scheme has no realistic prospect of buy-out in the foreseeable future given employer cash contributions and insolvency risk; and that the transfer improves the likelihood that members will receive full benefits on retirement.

The proposed transfer will be a new type of 'Type A' event under TPR's clearance regime, for which specific approval must be granted by the regulator. Trustees will need to provide clear evidence that the gateway tests have been met as part of the application, and may wish to consider appointing an independent trustee with sufficient expertise. The transfer should normally take place within three months of TPR issuing a clearance statement.

Superfunds will continue to be assessed against the expectations set out in TPR's interim regime. These include that they are well-governed; are run by fit and proper people; and that they are backed by adequate capital.

Pensions expert Michael Jones of Pinsent Masons, the law firm behind Out-Law, welcomed the detail around the gateway principles, which he said took a "noticeable backseat" in the interim guidance.

"The principles aren't overly prescriptive, and TPR is keen to emphasise that the particular circumstances of a ceding scheme will determine whether transfer to a superfund is a good option," he said.

"Foreseeability of buy-out is a scheme- and employer-specific assessment, focussing around employer cash contributions; the employer's willingness to improve scheme security without transfer to a superfund; and the risk of employer insolvency. The focus on employer insolvency risk reflects the market perception that initial transactions will be focussed around schemes with weakening covenants at risk of entering the PPF," he said.

Trustees "should ensure that advice and underlying assumptions are consistent across the three gateway principles and may wish to commission modelling demonstrating the respective security of members' benefits being secured in full by remaining with the employer or transferring to a superfund," Jones said.

"The guidance confirms that TPR does not expect trustees to replicate its assessment of the superfund, and the nature and level of due diligence will clearly vary depending on the scale of the scheme and requirements for the transfer. This is positive and reflects the scheme-specific nature of the due diligence process. TPR expects trustees to have considered other options available to them to improve the scheme's funding position and members' security in the longer term, including whether the wider group is able and willing to contribute more, before deciding whether the superfund destination is right for members," he said.

The guidance also covers transferring to a superfund after exiting assessment by the Pension Protection Fund (PPF) as well as partial transfers, where only a defined group of scheme members is transferred to the superfund.

"Trustees should be able to explain why a partial transfer is the best option for members given the scheme-specific circumstances," said Jones. "The gateway principles should be applied and the objective should be to improve the likelihood of all members receiving full benefits."

"This opens the way for transactions involving tranches of members. We expect insurers will play an active role in the due diligence process, especially since trustees need to disclose to TPR details of any approach made to the insurance market over the last year, including details of any buy-out price quoted," he said.