Superfund gateway tests could be 'all but impossible' to pass if too stringent

There is a risk that tests for schemes looking to transfer to defined benefit (DB) superfunds could be “all but impossible” to pass if too stringent, according to Lane Clark and Peacock (LCP) partner, Sam Jenkins.

Jenkins noted that schemes that are deemed to have the ability to reach buyout in the "foreseeable future" within The Pensions Regulator’s (TPR) gateway tests may be deemed not appropriate for a superfund.

Although he acknowledged that reaching a buyout should remain the “ultimate target” for schemes, he warned that overly stringent measures would risk “encouraging trustees to feel safer in the status quo than they perhaps should”.

His comments, which were in the form of a blog, come as the industry readies itself for TPR's expected update to guidance for trustees who are exploring the possibility of such a transfer.

Jenkins wrote: “The guidance needs to assist the trustees of ceding schemes as well as not impeding viable superfund transfers. Although a superfund is clearly not appropriate for all schemes, where there is a demonstrable benefit to a scheme and its members we hope the tests in the guidance do not set too high a hurdle.

“If they do, they risk impeding transfers that are ultimately in members’ (and struggling sponsors’) interests. Get it right and there will be better outcomes for sponsors, who may be able to revive their business without being encumbered by their pension scheme, and members, who will be more likely to receive their benefits in full.”

He also commented that he expected market interest in superfund transfers to pick up in 2021, following “nervousness from first movers”.

“With Covid-19 impacting the financial strength of many scheme sponsors, a superfund option feels more essential now than ever,” Jenkins concluded.

Research released by LCP in September estimated that the DB superfund market could reach £5bn annual volume by 2023, leading the pensions consultancy to call on sponsors to take a more proactive role in setting pension scheme strategies.

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