Industry welcomes TPR superfund guidance; covenant assessment concerns emerge

Pension industry organisations have welcomed the launch of defined benefit (DB) superfund guidance from The Pensions Regulator (TPR), although concerns around covenant assessment are emerging.

The guidance has outlined a series of 'gateway principles' for trustees and sponsoring employers of defined benefit (DB) pension schemes considering a transfer to a superfund, following the launch of an interim regime in June.

Commenting on the guidance, The Pension Superfund, co-founder and managing partner, Luke Webster, stated: “We are very pleased to see this update by TPR and its additional guidance to trustees who are exploring moving their DB pension scheme to a superfund structure.

“It very clearly describes the steps which trustees need to take. In particular, we are pleased to see TPR saying that trustees can take comfort from TPR's assessment of superfunds and that they do not expect trustees to replicate it: this is key to keeping transfer costs low and making superfunds widely accessible."

This was echoed by Clara-Pensions CEO, Adam Saron, who noted that the “proportionate approach” adopted by TPR to reflect scheme and employer circumstances was “particularly welcome”.

He stated: “We welcome this guidance. It confirms transactions are deliverable and confirms consolidators can ‘offer a secure destination for schemes and members’.

“We look forward to TPR completing their assessment of Clara in the near future and having our first transactions cleared thereafter.

“In creating a clear framework and checklist of things to consider, we also think this guidance provides a helpful framework for assessing all risk-transfer activity that trustees and sponsors may undertake.”

Broader industry organisations have also welcomed the revised guidance, with Isio partner, Mike Smedley, describing it as “ the missing piece of the puzzle for superfunds”, in turn enabling trustees to “bridge the chasm” between insurance buyouts and the Pension Protection Fund (PPF).

Smedley emphasised that amid intensified corporate distress intensifying, there is a “burning platform” for an alternative option for insolvent and distressed companies, noting that the guidance has left the superfund door “wide open” in insolvencies where the scheme escapes the PPF.

He continued: “We expect most of the superfund deals in the next 6-12 months will be insolvencies, where trustees will look at superfunds as an alternative to insurance in order to reduce members’ losses.

“A 10 per cent uplift in pensions in return for a little less security might be hard to turn down.

"For superfunds the current economic woes may well kick-start their growth. From the insurance industry’s perspective, there is still plenty of business to go around but they will lose their monopoly on these 'PPF plus' schemes.”

This was echoed by Mercer head of risk transfer and DB journey planning, Andrew Ward, who added: “The range of consolidation and end-game options increasingly resembles a spaghetti junction for trustees and sponsors hoping to navigate their way to security.

"The gateway guidance will be a helpful A-Z for dealing with some of the practical issues that the various parties have been working through when considering superfunds.

“In particular, the focus on maximising the likelihood of benefits being paid in full is sensible. We believe that by using these principles, a number of schemes will now approach a transaction with more confidence."

However, Smedley clarified that “it’s not all rosy for superfunds”, stating that the guidance has made it “clear” that insurance remains the gold standard for those who can afford it, placing the onus on trustees to demonstrate that a superfund deal is better for members.

“Often it will be clear that the status quo is best, and where the situation is finely balanced, trustees need to assess whether a bird in the hand in the form of a superfund is really worth two in the bush by relying on the sponsor longer-term,” he added.

Indeed, Dalriada Trustees, professional trustee, Charles Ward, whilst welcoming the guidance, noted that some smaller schemes may struggle with required assessments.

He explained: “If buyout isn't an option, now or in the future, then the focus is rightly on the likelihood of a better outcome for members after transferring to a superfund.

“While the guidance does advocate a proportionate approach to assessing this, based on the resources available to the scheme and taking into account the work already done by TPR on superfund strength, it will require detailed modelling of the interaction between future investment and covenant risks.

“Smaller schemes will find it difficult to access this advice cost-effectively, which could close off this option to them.”

However, Aon risk settlement team partner, John Baines, stated that a shift in pace on regulatory guidance on superfunds has given confidence to schemes considering this as a viable option.

He continued: “For trustees, the decision on whether to sever the link with a current sponsor in favour of a superfund is likely to be one of the most significant they ever take.

“By reaffirming a decision-making framework, including the regulatory support available TPR has given clarity to trustees and sponsors who are considering whether this really is a viable solution and is in their members’ best interests.”

Sackers partner, Claire van Rees, commented that the guidance "fills in a lot of gaps" about what trustees and employers need to consider when looking to transfer.

"In particular, there is helpful detail on the key principles to consider, and how far TPR expects trustees to go in conducting due diligence," she said. "It is clear that moving to a superfund will be a complex decision requiring robust supporting advice and TPR has even suggested that trustee boards consider appointing an independent trustee for additional expertise."

Furthermore, Hymans Robertson, head of corporate DB, Alistair Russell-Smith, highlighted how the guidance could also help to address some issues faced by small schemes.

He stated: “One key issue for the viability of transactions for smaller schemes is that the frictional costs of getting the right advice to support a transaction do not outweigh the other benefits.

“It’s therefore helpful that TPR confirms, in this guidance, that trustees can take some comfort from TPR’s own assessment of the superfund.

“It is also good to see it say that superfunds should provide ceding trustees with a summary of TPR’s assessment. A key judgement for ceding trustees is then the level of their own advice and due diligence that they carry out on top of this, which the guidance suggests, should be proportionate.

However, Russell-Smith also cited concerns around the covenant assessment, warning that the clearance application for superfund transactions outlined in the guidance is “very wide-ranging” and this could risk making the clearance application more onerous.

He explained: “It not only covers the more obvious points around how it improves member security, but also additional ones such as demonstrating why it is better than other forms of consolidation and support from the employer that might be possible, and considering if historic corporate activity had led to detriment to the pension scheme.”

Adding to this, Lincoln Pensions managing director, Adolfo Aponte, acknowledged that the guidance “could not have come at a better time”, stating that amid an increased number of corporates in “significant distress”, schemes without a realistic prospect of reaching an insurance buyout will now be able to target a more affordable end game solution.

However, he also stated that a superfund will not be the solution for every scheme, raising concerns as to how the strength of the existing corporate will be calculated, although in this case in relation to sponsoring employers.

He concluded: ”The covenant assessment will not only need to offer a view about future prospects, but it will also need to assess if the sponsor has taken any action in the past that could have been detrimental to the scheme.

"This lookback provision could catch corporates by surprise if they have not been carefully managing their pension exposure.”

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