Summary
The Pensions Regulator (“TPR”) has issued guidance in relation to defined benefit consolidation vehicles, including so-called “superfunds”, that enable employers sponsoring DB pension schemes to sever their link to the scheme in return for a capital sum. The guidance sets out the standards TPR expects to be met during the period until formal legislation is in place. There is guidance also for trustees and employers of schemes who are considering a transfer of members to a superfund (or other consolidation vehicle).
The aim of the guidance is to protect members of schemes that are transferred to a superfund, as they can no longer rely on the employer covenant and do not have the security of their benefits being provided by a regulated insurer and protected by the Financial Services Compensation Scheme. Superfunds should not accept a transfer from a scheme that has the ability to buy out or is on course to do so within the foreseeable future (which TPR sees as the next five years).
Before a superfund launches TPR will need to be assured that the superfund:
- is capable of being supervised by its trustee(s),
- is run by fit and proper persons with effective governance arrangements in place,
- is financially sustainable and has adequate contingency plans in place to manage funding level triggers, as well as to ensure an orderly exit from the market,
- has sufficient administrative systems and processes in place to ensure that it is run effectively and
- is registered with HMRC and eligible for the Pension Protection Fund (“PPF”).
Financial sustainability and the “capital buffer”
The guidance includes requirements as to how the “capital buffer” (capital injected by the sponsoring employer and/or the superfund’s investors, as a replacement for the employer covenant) is managed.
There will be two legally enforceable triggers for particular actions:
- Low risk funding trigger: if the scheme’s funding level falls to 100%, the funds in the capital buffer will have to pass to the scheme and fall under the sole control of the trustees;
- Wind-up trigger: if the funding level on the PPF basis falls below 105% the scheme will have to be wound up and the members transferred out. This provision is to protect the PPF.
Initially (for at least 3 years), in order to align the interests of members and investors, superfunds should not extract funds from the scheme or the capital buffer unless members’ benefits are bought out in full. There will be controls over the level of fees that can be charged as well, to avoid superfunds circumventing the restrictions on extraction of funds.
The guidance sets out principles for the investment of the scheme assets and the capital buffer. Any increase in investment risk should be accompanied by an increase in the capital buffer.
Systems and processes
The guidance contains a high-level summary of the areas TPR will assess initially in relation to administrative systems and processes, including in relation to member data, communications and complaints. It intends to publish further detail on the information it will require in relation to data, cyber security, administration tasks and processes and trustee board oversight.
Superfunds will be regulated as occupational pension schemes, so all TPR’s other powers will apply as they do to schemes that still have an employer attached. Ongoing supervision will require regular reporting to TPR, both on a periodic (eg quarterly) basis and on the occurrence of certain specific events.
Guidance for trustees
Trustees who are considering transferring their members into a superfund should notify TPR as soon as possible and at least three months before the planned transfer, outlining their rationale and evidence that transferring to a superfund will enhance member security. Their due diligence should include obtaining an independent assessment of the employer covenant and actuarial modelling of potential outcomes under the present scheme and in a superfund.
Trustees should be aware that, if hindsight proves that they made the wrong decision, they will be able to defend that decision if they have:
- obtained as much relevant information as they reasonably could,
- ignored irrelevant considerations and taken into account only the relevant factors,
- taken professional advice where appropriate,
- acted in accordance with the provisions of the trust deed and
- made the decision in good faith.
Trustees need also to keep full records of the decision-making and how they reached their conclusions.
Guidance for employers
Before a scheme is transferred to a superfund TPR expects the ceding employer to apply for clearance. The employer should ensure that the ceding trustees have access to the information they need to undertake their due diligence and meet the cost of the trustees’ professional advice. The clearance application should include the trustees’ due diligence in relation to the superfund.