Superfunds are go!

18 June 2020 - The Pensions Regulator today announced its guidance for supervising the commercial consolidation of defined benefit pension schemes into Superfunds.

Consolidation into "Superfunds" we expect will be very popular with employers wishing to discharge their obligations for less than the cost of a traditional insurance company buy out. At the same time a Superfund will provide greater security for members' benefits. However, Superfunds create a tension between the interests of members and those who operate the Superfunds for financial profit. This conflict needs to be carefully managed and the Regulator's proposals (rightly) put members' interests above those of the financiers.

Modelling for the Regulator predicts a very high probability (99%) that Superfunds supervised under the new regime will be able to pay all members' benefits in full. The new regime will achieve this by requiring:

  • Superfunds to be well funded on a prudent basis;
  • additional funding to be provided by the financiers which acts as a capital buffer that can be accessed to fund members' benefits if need be; and
  • Superfund investments to be spread over a range of assets with regular monitoring of ongoing funding levels by the Regulator
Commenting on the announcement, Duncan Buchanan, a partner in the pensions team at Hogan Lovells said: "The Regulator's announcement is welcome news as it will give employers a new option to secure their pension liabilities by transferring them to a Superfund. This is likely to be attractive to many employers even though a final contribution will be needed to reach the required funding level for transfer. After transfer the link with the employer is severed.

"The supervisory framework proposed by the Regulator is designed to make sure that Superfunds are well funded and provide a very high level of certainty that members' benefits will be met in full. This compares to the current position where member benefits under traditional defined benefit pension schemes rely on the continued solvency of the employer. Where employers become insolvent there is often insufficient money available so benefits need to be reduced and members moved to the Pension Protection Fund.

"Over recent years some employers have wound up their schemes and secured pension benefits in full through insurance policies and this remains the "gold standard". However, the extra cost needed to buy out is beyond reach for most employers particularly where there are many members whose benefits have not yet come into payment. For those employers and their members a Superfund may be the next best option and improve security for members (a silver standard, so to speak).

"Trustees of schemes asked to agree to a transfer to a Superfund will need to take specific legal and covenant advice to make sure that transfer would be beneficial for their members and an insured buy out is beyond reach. The involvement of the Pensions Regulator in both the transfer process (requiring formal clearance) and the ongoing supervision of Superfunds will definitely assist trustees and should give reassurance to the transferring members.

"I expect a number of my clients will be keen to investigate moving their pension schemes to a Superfund so they can focus on their businesses free of historic pension liabilities that consume significant management time and expense. "

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