The Pensions Regulator recently published guidance for supervising the consolidation of defined benefit pension schemes into superfunds. The guidance provides an interim framework for the regulation of superfunds, prior to a statutory framework being put in place.
It’s a step towards establishing a superfund industry which could be a viable endgame option for certain schemes in the future.
What is a superfund?
Superfunds consolidate assets from various pensions schemes aiming to benefit from economies of scale and manage the money more efficiently.
An employer’s link with a pension scheme ceases after the transfer to a superfund.
So for employers wishing to offload their defined benefit pension obligations, where the cost of buy-out with an insurance company is beyond reach, they are an attractive option.
For members they represent less security than under a buy-out but members may find themselves in a better position than under their current scheme, either in covenant terms or because the superfund has advantages which come with scale (i.e. cost efficiencies, pooling of risk, enhanced investment opportunities).
A viable endgame?
There’s a funding “sweet spot” where superfunds are attractive – buy-out is unaffordable but a superfund transaction is. However, falls in funding levels due to recent market turmoil may mean schemes that were previously in that sweet spot no longer are. Also, less employers may now be able to spare the cash to make the transaction happen. In many cases, significant employer contributions will be required to make a superfund transaction feasible.
On the flip side, the pandemic highlighted how volatile pension scheme funding can be, particularly for schemes with low levels of liability hedging. Employers may want now, more than ever, to finally settle their defined benefit pension risk.
The Regulator’s guidance sets a “high bar” with requirements to show superfunds are well-governed, run by “fit and proper people” and have adequate capital backing. The capital adequacy of a superfund is one of the most important parts of the regime.
The Governor of the Bank of England has however voiced concern that superfunds could threaten the UK’s financial stability because they don’t have to comply with the same capital adequacy requirements as insurance companies.
Despite the protections offered by the interim regime, it’s no easy decision assessing whether a superfund is the right alternative endgame for a scheme.