Industry hails first TPR-approved DB superfund as ‘significant milestone’

The industry has described The Pensions Regulator’s (TPR) approval of the Clara-Pensions defined benefit (DB) superfund as a “significant milestone” and a “landmark day” for DB schemes in the UK.

Clara-Pensions became the first DB superfund to complete TPR assessment yesterday (30 November) and can begin to operate in bringing pension schemes onboard, subject to TPR clearance.

“This is a landmark day in the history of DB pensions as it opens up a new endgame for schemes that has not previously existed,” commented Hymans Robertson senior risk transfer consultant, Iain Pearce.

“This will provide more options to protect members’ benefits, especially for those schemes where there are significant doubts about their ability to be able to insure benefits in full at some point.

“Adding Clara-Pensions to its website signals to the pensions world that TPR is now willing to accept clearance applications for individual transfers and is a massive confidence boost to an industry which has been waiting a long time for further developments after the superfund guidance was issued in the middle of 2020.

“The likely candidates to be the first schemes to transfer to a superfund are already very well progressed and have been engaging with TPR for some time. Therefore, we’d expect those first applications to be submitted very quickly, and we may see the first transfers finalised in 2022.

Pearce noted, however, that the requirement to get TPR clearance for every case means that TPR’s initial assessment is not the final hurdle, and he expects TPR to closely scrutinise all cases, paying particularly close attention to the first movers.

Furthermore, regulatory uncertainty will remain “for time being", he added, as there remains an expectation of a future dedicated regulatory regime for superfunds which may “shift the goalposts” for superfunds, trustees and sponsors.

LCP head of corporate consulting, Gordon Watchorn, described Clara’s approval as a “red-letter day” for schemes and sponsors.

He continued: “Where a scheme is unlikely to reach buyout funding levels in the near future, moving to a superfund offers a potential win-win for members and employers.

“The member benefits from being part of a larger scheme with a potentially increased chance of pensions being paid in full, whilst the employer gets the opportunity to settle their pension bills once-and-for all.

“There will clearly need to be careful ongoing regulation of superfunds to make sure they live up to their potential, but today’s announcement by TPR marks a major step forward in the world of pensions.”

PwC pensions covenant adviser, Lauren Baba, hailed the approval as a “significant milestone”, as superfunds will be an “increasingly viable endgame option as more pension schemes face greater uncertainty over the longer-term strength of their sponsor’s covenant”.

The decision to transfer to a DB superfund by sponsors and trustees will require “careful analysis” of a wide range of areas given the need to meet TPR’s prescribed tests, according to PwC pensions adviser, Matthew Cooper.

“Sponsors and trustees will be looking for a streamlined way to assess these requirements so that transactions can be implemented in a timely and cost-effective manner,” he added.

Meanwhile, Arc Pensions Law senior partner, Anna Rogers, said she was “pleased” to see the announcement, but warned that DB superfunds would need to be properly regulated.

“Trustees will be the ones who make the decision whether to move to a superfund,” she continued.

“It may not be an easy call, but trustees might find the segregated structure of the Clara model appealing. It’s designed to reduce the element of cross-subsidy between the schemes that have come in.

"Perhaps we’ll see the first transfers happening soon now, but it will take a while before it’s a well-trodden path.

“The legal process will be similar to bulk annuity purchase in many ways. It won’t be an ‘all-risks’ transfer so it’s important for the trustees to make sure that there’s no leakage of members’ rights.

“A consolidator is only going to provide the specific benefits that have been bought. That means trustees will want to think about benefit specifications, contracts, residual risk and employer indemnities in the same way as for a buyout."

Barnett Waddingham principal and senior consultant, Tom Hargreaves, concluded: “Whilst it may still be some months before the first transactions receive formal clearance, this is another clear step forwards for this market and gives trustees and employers confidence that superfunds are a genuine endgame option.

"The regulator’s robust assessment process should also give trustees a significant base to work from in determining whether this is the right option for their members.

“However, there remains uncertainty in the market, with no indication of timescales for other superfund providers completing their assessment processes.

"Schemes looking to superfunds as a long-term objective will need to be sure to retain the flexibility to adapt to new information as it emerges, whilst those considering a transaction in the short- to medium-term should engage with their advisers, the superfunds and TPR as soon as possible to give themselves the best chance of getting this done.”

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