TPR fires starting gun on DB pensions consolidation

The Pensions Regulator (TPR) has fired the starting gun on DB pension consolidation with new guidance on the regulation of superfunds. Whilst the market will take time to truly digest the implications of the guidance, the following points are worth noting.

This is the beginning of a new legislative and regulatory framework for DB pensions superfunds and protecting members from ‘innovation risk’ is at its heart

Faced with the pace of de-risking innovation moving faster than the development of a new legislative framework, TPR’s guidance aims to manage the ‘innovation risk’ that might otherwise be borne by the members of the first movers. As part of this, all schemes looking to transfer to a superfund will be required to first seek clearance from TPR.

The framework announced today sets a meaningful capital adequacy requirement for superfunds and includes a handful of features that are reminiscent of the Solvency II regime.  Developing trust in these untested provisions will be key.

Understanding the covenant of the superfund, and how it compares to the current employer, remains crucial to any transfer decision

In its guidance, TPR recognises, that superfund consolidation will not be appropriate for all schemes, including those that are underpinned by strong and stable employer covenants and/or those that could transfer to the insurance regime over the medium term.

TPR also notes that the capital arrangements supporting superfunds can be complex and that they bring challenges as well as benefits. Before proceeding with a transfer, trustees will need to think carefully about what they are getting in exchange for selling their employer covenant link.

The guidance leaves unanswered questions over whether superfunds will be able to benefit those schemes who need them the most

Superfunds could become a credible alternative for smaller schemes and those with challenged employer covenants that would otherwise be facing the prospect of compromising members’ benefits through a PPF+ insurance transfer.

However, there is a distinct possibility that schemes that could most benefit from a transfer to a superfund, are not able to afford the solution. During this interim period, there is a need to continue to foster innovation for those schemes and sponsors that in the current economic environment are in real need of support.

The guidance could have unintended implications for DB funding

By setting out in stark terms what funding level TPR considers to be ‘good enough’ for a consolidator it could unintentionally be drawing a new line in the sand for other DB schemes plotting a journey to an end game. It is not clear how this target is meant to interact with TPR’s open consultation on DB funding, and how it may impact future scheme funding discussions.

Adolfo Aponte, Managing Director at Lincoln Pensions said:

“In this economic environment, we have seen renewed interest from clients for bold new solutions that can clearly improve the security of members benefits.

TPR has started to open the floodgates 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.”

The full guidance can be found on TPR’s website via this link.