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TPR is getting ready for the first superfund transactions


October 21, 2020

The Pensions Regulator is getting ready for the first superfund transactions. Guidance has been issued today for trustees and sponsors of defined benefit pension schemes, with the first transactions expected over the next few months.

The rollout of the framework to enable defined benefit pension schemes to transfer to superfunds continues with today's publication by TPR of updated guidance to trustees and sponsors considering such transactions.

This follows TPR’s publication in June 2020 of guidance on how it will assess and oversee superfunds operating in this market.

Today's publication is significant as it demonstrates that the various pieces required to enable the first transactions with superfunds to happen are falling into place.

Whereas exploring a superfund transaction may have appeared speculative 18 months ago, that is no longer the case. In particular, schemes with weak or failed covenants that may be able to afford a transfer to a superfund, and where such a transfer would tangibly and demonstrably improve member outcomes, should now start exploring this option.

What does today’s guidance say?

Any board of trustees already exploring a potential transaction to a superfund should not be surprised by the contents of today's guidance. It explains the considerations that should be covered by the trustees and the sponsor and the advice they should seek.

The guidance helpfully provides additional detail on process and on TPR’s expectations. It also sets out guidance on how much due diligence trustees should undertake on the superfund itself. This is helpful, particularly for smaller schemes, where extensive due diligence on the superfund may be disproportionate and duplicate what has already been considered as part of TPR’s own assessment process.

The guidance extends into areas not covered by earlier guidance. These include:

  • The special considerations for schemes in PPF assessment – a situation in which superfunds may offer considerable improvements in member outcomes.
  • Issues to be considered when investigating solutions that might allow a scheme to continue running after the insolvency of the corporate sponsor.
  • Use of structures that might break the link to the corporate sponsor without transfer to a superfund.

What key criteria need to be satisfied?

Although there are a whole host of requirements and expectations, there are three specific key criteria set out to clarify the “gateway principles” These are consistent with the advice we have been giving to clients considering potential transfers to superfunds:

  • A transfer to a superfund should only be considered if a scheme cannot afford to buyout now.
  • A transfer to a superfund should only be considered if a scheme has no realistic prospect of buyout in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer.
  • The transaction should only go ahead if transfer to the chosen superfund improves the likelihood of members receiving full benefits.

However, there are challenges. For example, in relation to the third factor above, modelling the likelihood of members receiving full benefits can be very dependent on the assumptions used and on the model’s limitations. We believe there needs to be a very clear and unquestionable improvement in member outcomes rather than a marginal improvement.

What next?

The next key milestones in relation to the rollout of superfunds will be TPR’s confirmation that the first superfunds have completed TPR’s assessment process and, then, announcement of the first actual transactions. We expect these milestones to be completed in the next few months.

In the meantime, we recommend that trustees considering transfers to superfunds follow our six-step superfunds transfer advisory process. The pace of activity will be dependent on the urgency of the situation and appetite to be an early mover:

  • Understand what a superfund solution would look like and mean to members.
  • Establish the facts.
  • Develop the best alternative solution(s) to a superfund.
  • Compare solutions, including the superfund.
  • Agree the way forward.
  • Implementation.
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