Superfunds: New guidance from TPR

The Pensions Regulator has published new guidance for defined benefit pension superfunds.

This new guidance is intended as a stop-gap while DWP develops its legislative framework to formally authorise and supervise superfunds.

This will fire the starting gun on DB pensions consolidation at a time when, more than ever, the sustainability of DB pensions is being called into question. But consolidation won’t be easy with three important gateway principles that trustees and sponsors must meet to safeguard members’ benefits.

We summarise the key points of the guidance below:

  1. Looking forward
    TPR is clear that DB consolidation should only be an option where a buyout is neither affordable now nor a realistic prospect in the foreseeable future. As ever, informed judgement will be required to establish what is realistic and foreseeable. It will also be critical to test what the covenant can afford as a going concern and in insolvency.
  2. It’s behind you?
    As well as looking forward, trustees need to look backwards and consider any events which may have extracted value from their covenant. Trustees will have been expected to secure mitigation that is due to them before considering a transfer to a consolidator. Events that may have seemed reasonable at the time may, with the benefit of hindsight, now be worthy of a second look.
  3. Trustees need to make the case to TPR
    TPR will require trustees and sponsors to go through the clearance process for every consolidation, and the onus will be on trustees to demonstrate the process and diligence they have gone through with their advisors. Appropriate covenant advice will be required both to consider the covenant that is being relinquished, and to help trustees understand the specific consolidator covenant that will be received in exchange.
  4. A new benchmark?
    The new guidance will be relevant to most trustees with weaker covenants (including potential PPF assessment situations), not just those who are actively considering a transfer to a superfund. By providing an end game which is expected to be more affordable than buyout, trustees will need to consider whether their existing long-term objective goes far enough. Reaching a position where full benefits could still be paid through a superfund could be important protection against future covenant risk.

Adolfo Aponte, Managing Director and Head of Covenant Risk Transfer at Lincoln Pensions said:

“TPR’s new guidance for superfunds could not have come at a better time. With an increased number of corporates in significant distress, schemes without a realistic prospect of reaching an insurance buyout will now be able to target a more affordable end game solution that is designed to deliver a high standard of protection to pension benefits.

We are already working with a number of schemes and sponsors looking for pragmatic solutions that deliver on their pensions promise, but also protect jobs for the current generation of employees that is struggling given this economic backdrop.

While the guidance provides much-needed clarity on the thought process trustees and sponsors will need to go through, expert judgement will be required to support the clearance application. The Regulator stresses the importance of taking independent covenant advice that is consistent across the three principles of the gateway test.”

The full guidance can be viewed here.

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