The Pensions Regulator (TPR) has confirmed a temporary framework of rules for the consolidation of DB schemes in so called “super funds”, offering an alternative to an outright buy-out.
In the absence of a permanent regime for DB scheme consolidators, the new interim guidance put forward by TPR will enable consolidator firms such as The Pensions Superfund and Clara to strike much more direct conversation with sponsors about offloading their obligations to a consolidator. Clara announced that it is hoping to complete the first set of transactions into the consolidator fund by the end of this year.
While buy-outs are currently regulated under Solvency II and have to pass relatively stringent capital requirements for insurance companies, DB scheme consolidators are not subject to these rules. Moreover, the fall under The Pension Regulator’s supervision, rather than under that of the Prudential Regulation Authority, as insurance companies would.
There are currently 5436 DB schemes in the PPF’s universe, with some £1.6trn in assets and only 11% of these schemes are open to new members, according to the PPF’s 2019 Purple Book, offering the emerging super fund market a big pool to fish from.
Under the new interim guidance, DB consolidators would be expected to provide the employers handing over their obligations with a transparent overview of their fees, funding and investment objective and the superfund would have to prove to the regulator that the scheme in question is PPF eligible.
Capital requirements will be of pivotal importance for the emerging superfund market. As it stands, in the event of superfunds failing to hold enough cash to pay out pensions, the schemes in question would be passed on to the Pension Protection Fund, a potential benefit cut for scheme members.
For now, the regulator specified that the superfunds should hold sufficient financial resources to cover running and set up costs, including the potential costs of a low-risk intervention or wind-up trigger. TPR also stressed that financial reserves of the schemes in question should be ring fenced.
Crucially, the regulator also outlined that it expected a proportion of those reserves to be held in cash or cash-like securities to cover short-term liability issues, similar to the rules applicable to the insurance sector. While the regulator did not spell out the exact proportion of cash-like assets to be held, this requirement could put cash-flow aware investing strategies high on the agenda of DB consolidators.
Passing pension scheme obligations on to a super fund could therefore work out as a cheaper option for scheme sponsors, who might welcome this opportunity to cut costs in financially challenging times. It is an initiative which has been encouraged by pensions minister Guy Opperman, who welcomed the interim regime and pledged to continue working on a permanent framework. However, in the absence of legislation being passed, TPR’s framework only serves as a guidance and is not legally enforcible.
The push for superfunds has been received with caution by others, including the Bank of England, which has warned in a paper last year of the risks of subjecting superfunds to less stringent standards than the insurance industry: “Government risk appetite for DB pension scheme consolidator failure may be higher than the Government risk appetite for insurance firm failure”it said in a note.
The Association of British Insurers criticised TPR’s guidance as “light-touch and short on detail.” Yvonne Braun, director of Policy, Long-Term Savings and Protection at the Association of British Insurers,warned that it was hard to see how trustees could be comfortable with passing assets on to a superfund and said that the interim guidance risked pension savers being sold down the river.
Critics also point out that superfunds are for-profit enterprises backed by private equity firms, Disruptive Capital and Warburg Pincus in the case of the Pension Superfund, or TPG Sixth Street Partners in the case of Clara. Their short-term financial interests could come to clash with the long-term interests of scheme members, who above all would want to ensure that their pensions are being paid out in full.