The Pensions Regulator (TPR) has updated its guidance for superfunds to set out a “clear” expectation for the release of capital from defined benefit (DB) superfunds.
The regulator said it listened “closely” to the industry regarding capital release, adding that the position in the updated guidance supports innovation, while retaining protection for scheme members.
The previous version of the guidance only allowed capital to be released when benefits were bought out. The new DB superfunds guidance now states that capital can be released up to twice a year and when meeting a specific trigger and safeguards.
Standalone principle
The previous version of the guidance stated that upon a transfer of a new scheme to the superfund, fresh capital was to be provided at a level which, together with value obtained through the transaction, would satisfy capital requirements if that pension scheme was considered in isolation.
The new version dispenses with the standalone test as long as the superfund in total is funded above the level at which capital might be released.
Capital backed arrangements
The regulator has also relaxed standard capital adequacy requirements where a pension scheme’s sponsoring employer becomes insolvent and the scheme is unable to afford the buyout of full benefits, or to enter a superfund or capital-backed arrangement on full capital adequacy terms.
In such circumstances, TPR said that trustees should be confident that the transaction is in members’ best interests and that, even on the lower capital adequacy basis, the level of benefits members might receive would represent a material improvement from buying out with an insurer on PPF+ benefits levels.
The updated guidance was widely welcomed by the pensions industry.
Simon True, chief executive officer of Clara-Pensions, which completed UK’s first superfund transaction last November, said the updated guidance was an “important step forward” for the superfund model, enabling more schemes to access consolidation, ensuring greater security for more members and deriving more benefit for the UK economy.
He said: “We particularly welcome the regulator’s dynamic approach by updating the guidance for the second time – responding effectively to market need in a way that will support the growth of the sector.”
Patrick Lloyd, senior consultant and head of alternative de-risking at XPS Group, added that the recent Clara transaction demonstrated a viable end-game alternative for trustees and sponsors looking to deliver better outcomes for members.
He added that the new DB superfund guidance will enable more flexibility around how this is provided and potentially widens the universe of schemes that could now consider these solutions.
Iain Pearce, head of alternative risk transfer solutions at Hymans Robertson, said that to date, TPR’s interim guidance has not allowed providers to generate ongoing returns from successfully managing the risks within a superfund.
“TPR has become increasingly vocal in confirming it supports a wide range of suitable endgames for schemes”
Iain Pearce, head of alternative risk transfer solutions at Hymans Robertson
He added that this has effectively restricted commercial superfund models to temporary “bridge to insurance” models, as seen in the first two Clara transactions.
However, he said that this latest evolution in the guidance is “less restrictive” and signals that the superfund market is “truly open for business and innovation”.
He explained: “Having perhaps understandably taken a cautious approach for the first steps in the development of this market, TPR’s guidance is now better aligned to the wider messaging of the Annual Funding Statement and beyond.
“TPR has become increasingly vocal in confirming it supports a wide range of suitable endgames for schemes. It clearly sees scope for a range of solutions to play an important role in the pensions landscape to support positive outcomes for members and other stakeholders.”
Pearce said that this is clear from the “deliberate” inclusion within this guidance of references to the wider capital-backed solutions that do not meet the definition of a superfund.
Whilst he expects the regulator to take a cautious approach, he said it was crucial that TPR demonstrates an openness to innovation if it is serious about encouraging a range of commercial providers to make available new solutions.
“With this in mind, we welcome the sentiment that invites stakeholders to engage with TPR where there is a strong belief that deviating from the central guidance leads to much better outcomes. Schemes backed by a distressed sponsor that cannot quite afford to transact with a superfund, could benefit from this,” he added.
Pearce said he is looking forward to the day when superfund legislation is passed, however “that does not feel imminent” as the industry awaits a pensions review from the new Labour government.
“We therefore expect the market to operate under the latest form of guidance for some time,” he noted.
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