Guest comment: A look at TPR's DB superfund guidance

On 21 October 2020, The Pensions Regulator (TPR) published new guidance for trustees and employers contemplating a transfer to a defined benefit (DB) superfund.

The guidance sets out TPR’s approach to regulating transfers, and its expectations of trustees and employers when considering whether to transact. This follows on from TPR’s June 2020 interim regime for assessing DB superfunds, pending the establishment of a full statutory framework which is now expected in a further Pensions Bill at some point during the current Parliament.

Key points from the guidance

• TPR notes that “well-run superfunds have the potential to offer good outcomes for pension savers and employers, but they will not be the solution for all schemes”.

• Before trustees and their sponsoring employers enter into a superfund transaction, they will need to demonstrate why they believe it is in the best interest of members, and how the transaction meets three 'gateway principles'.

• Transferring employers must apply for clearance and trustees must demonstrate that they have carried out appropriate due diligence in respect of the transfer. Where a clearance application is not appropriate, for example, as the scheme is in Pension Protection Fund (PPF) assessment, TPR still expects to be notified of the transaction so that it can engage with the relevant parties.

• The guidance provides specific information on transferring to superfunds where there is no immediate severance of employer covenant, for schemes in PPF assessment, and on partial transfers.

• Schemes should ensure that they take appropriate professional advice and that they engage with TPR “at an early stage”. TPR also suggests that trustees should consider the appointment of an independent trustee “in view of the complexity of the considerations”.

Gateway principles

TPR makes clear that the three gateway principles will be key in their consideration of a clearance application. Trustees must be “content that the gateway principles are satisfied and provide a rationale for their conclusions”. The gateway principles are:

• The scheme cannot afford to buyout now.

If buyout is affordable, TPR expects trustees to choose this option on the basis that if offers greater security for members’ benefits.

• The scheme has no realistic prospect of buyout in the foreseeable future.

TPR generally expects this to be a period of up to five years but appreciates that it may be difficult for trustees (and their advisers) to make this assessment with any great clarity for periods longer than three years. Trustees will need to provide a rationale for the timeframe they are using and TPR acknowledges that it will be specific to the employer’s circumstances. It is likely that early engagement with TPR on this point will be key.

• The transfer will improve the likelihood of members receiving full benefits.

This will be a fact-based assessment by the trustees. In some cases this will be fairly straightforward, for example where employer insolvency is imminent and the scheme is unable to afford buyout. But in other cases, the merits of the transaction may be “finely balanced” and the trustees and their advisers will need to make their assessment based on the employer's covenant, future risks and potential downsides.

TPR’s guidance provides greater clarity for trustees and employers considering a transfer to a DB superfund. Where assessment of the gateway principles is not clear-cut, it will be important to engage at an early stage with TPR and, as TPR notes, it is likely that the third gateway principle in particular will develop as transactions get going under the new regime and TPR will “evolve [its] approach in line with market innovation”.

Yet despite the apparent regulatory and government support for DB superfunds, it remains to be seen whether the market for this type of transaction will live up to expectations in practice.

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