Govt working to mitigate risk of regulatory arbitrage in DB superfund regime

Economic Secretary to the Treasury, Bim Afolami, has stressed the need to mitigate any potential risk of regulatory arbitrage in the permanent regime for defined benefit (DB) pension superfunds.

The Work and Pensions Committee (WPC) previously wrote to Afolami to request further details about the government’s plans for a permanent regulatory framework for DB superfunds, querying whether primary legislation would be needed for this.

In his response, Afolami confirmed that primary legislation is required for a permanent regulatory framework for pension superfunds, which the government intends to introduce "as soon as parliamentary time allows".

Indeed, Afolami previously told the committee that the government is keen to introduce the regime “as soon as possible”, as the ‘gateway test’ had put a clear delineation between the insurer space and a superfund space, and the Treasury was now happy with the broad framework.

Asked what changes to the gateway test had addressed the Treasury’s concerns about the pension superfund regime, Afolami stressed the need to mitigate any potential risk of regulatory arbitrage.

"As you are aware, superfunds are economically very similar to an insurer but held to a different regulatory standard with lower capital requirements," he wrote.

"The gateway is a mechanism that will ensure pension schemes that can afford to secure members’ benefits with insurers do so and are excluded from superfund consolidation.

"It will do this by requiring trustees to have taken appropriate legal, actuarial, investment and covenant advice when determining the suitability of consolidation into a superfund."

Afolami also stressed the need for the gateway test to balance scheme member protection and recognition of market dynamics and government policy.

However, he clarified that insurance buyout is still the “gold standard” for DB scheme consolidation, explaining that the gateway should act as a mechanism that allows members of those schemes that cannot access insurance buy-out to access consolidation through a superfund, while schemes that can access insurance buy-out continue to do so.

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