UK Pensions – A step closer to the first DB superfund transaction

The Pensions Regulator has published guidance for trustees and employers of defined benefit (DB) pension schemes considering transferring to a superfund. This follows the introduction earlier this year of an interim regulatory regime for assessing and supervising superfunds, pending the full legislative framework that the government intends to put in place in due course.

The guidance should provide employers and trustees with the confidence to proceed with a superfund transaction where this is appropriate for their scheme. However, the Regulator has set high expectations for those looking at this option and it is clear that a significant amount of preparation and due diligence will be required.

What is a superfund?

A superfund is an occupational pension scheme set up “for profit” – examples in the market include Clara-Pensions and the Pension SuperFund. The idea is that the consolidator takes on the assets and liabilities of DB schemes by way of a bulk transfer. The superfund is a single employer scheme with no link to the transferring scheme (or its sponsoring employers). It will include a capital buffer which sits outside the scheme.

What does the guidance say?

The guidance says that, before trustees and employers enter into any transaction with a superfund, the Regulator expects them to demonstrate why they believe the transaction is in the best interests of members, and how the transaction meets the following “gateway principles”:

  • A transfer to a superfund should only be considered if the scheme cannot afford to buy-out now, and has no realistic prospect of buy-out in the foreseeable future. This will, according to the Regulator, depend principally on the scheme’s funding level (and how this is expected to progress in the future) and the strength of the employer covenant. The Regulator says that the “foreseeable future” will be specific to the employer’s circumstances but, in general, will be a period of up to five years.
  • A transfer to the chosen superfund must improve the likelihood of members receiving full benefits. The Regulator notes that the benefit of transferring to a superfund may be clear in some cases, e.g. where there is an imminent risk of the employer entering insolvency and the scheme’s funding level is significantly below the estimated buy-out funding level. But in other cases, e.g. where the current employer covenant is strong, the merits of the transaction may be more finely balanced.

The Regulator expects employers to apply for clearance in relation to a transfer to a superfund in most cases. Before it will provide a clearance statement for the transaction, the Regulator expects trustees to confirm that the gateway principles have been met and to provide the rationale for this view. Where trustees cannot demonstrate the principles have been met, the Regulator will generally be unable to provide a clearance statement. If clearance is not provided and a transfer to a superfund goes ahead, employers could potentially leave themselves open to the risk of regulatory action.

The Regulator plans to publish a list of the superfunds which have been assessed and which met the Regulator’s expectations at the date of assessment. However, the Regulator expects trustees to carry out their own due diligence and demonstrate that thorough consideration has been given to their decision.

The guidance sets out details of what this due diligence should cover. The guidance also says that trustees need to demonstrate in the clearance application that they have considered past significant corporate activity (e.g. mergers and acquisitions or bank refinances) for any material detriment. This adds an additional (and perhaps unexpected) layer of work for employers and trustees. The Regulator says that applicants should allow at least three months following the submission of a clearance application for a decision to be made. Trustees and employers will need to factor this (and the substantial amount of preparatory work required) into their timelines.

For more information, please speak to your usual Linklaters contact.