TPR outlines 'gateway principles' for DB superfund transactions in new guidance

The Pensions Regulator (TPR) has outlined a series of 'gateway principles' in new guidance for trustees and sponsoring employers of defined benefit (DB) pension schemes considering a transfer to a superfund.

Under the guidance, trustees are expected to demonstrate why a transfer is in the best interest of members, as well as how it would meet a series of ‘gateway tests’, which trustees must ensure have been met.

The gateway tests outlined in the guidance explain that a transfer to a superfund should only be considered if a scheme cannot afford to buyout now, and that a transfer to a chosen superfund must improve the likelihood of members receiving full benefits.

Furthermore, it states that a transfer to a superfund should only be considered if a scheme has no realistic prospect of buyout in the foreseeable future, owing to potential employer cash contributions and the insolvency risk of the employer.

The guidance confirmed that a transfer to a superfund will be considered a new category of clearance Type A event and, as such, TPR will expect ceding employers to apply for clearance in relation to a transfer from their scheme to a superfund.

The regulator stressed that the gateway principles will be a “key area” when considering a clearance application, noting for transactions where a clearance application is not appropriate, it will still expect notification of the transaction and engagement from both the ceding scheme and superfund.

It also stated that the superfund will be expected to demonstrate that it will continue to meet TPR’s expectations regarding capital adequacy, as this will be a key consideration of the regulators assessment as to whether any detriment has been adequately mitigated.

In addition, the guidance encouraged trustees to obtain appropriate professional advice in considering and undertaking a superfund transfer, including “ appropriate and proportionate” actuarial and professional covenant advice.

TPR has predicted that where a transaction proceeds, it should normally take place within three months of the regulator issuing a clearance statement.

Commenting on the new guidance, TPR executive director of frontline regulation, Nicola Parish, said: “Following the launch of our interim regime for superfunds in June, we are now providing further details about our expectations of employers and trustees who may be considering the significant step of transferring to a superfund.

“We know that some employers and trustees are keen to explore whether a superfund could provide another option for their DB scheme and for employers allow them to focus on future sustainability.

“However, while we await government legislation, we are determined to protect savers who may be moved into a superfund by rigorously assessing providers and then supervising them closely.

“Trustees need to ensure they are confident a superfund is the right option for their members, the transaction meets the gateway principles and only consider using a superfund named on the TPR website.”

The guidance has been welcomed by existing superfunds, with Clara Pensions CEO, Adam Saron, highlighting the “proportionate approach” from TPR, which reflects scheme and employer circumstances, as “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.”

The Pension SuperFund co-founder and managing partner, Luke Webster, added: "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."

Broader industry organisations have also backed the guidance, with Lane Clark and Peacock partner, Gordon Watchorn, highlighting it as an “important step on the long and winding road to superfunds”.

He stated: “As the guidelines point out, in some cases the comparison with a superfund will be relatively clear cut, especially where the current employer seems unlikely to survive.

“But there will be many more cases where the decision is more finely balanced and trustees will need to demonstrate they have taken careful advice on the balance of risks associated with different strategies.

“This will include assessing how scheme funding and sponsor strength are likely to evolve over the next three to five years in order to judge whether a buyout will be a realistic option over that time period.

“I hope that the publication of these guidelines will pave the way for the first superfund transactions next year and the implementation of an important option for trustees and sponsors looking to do the best for scheme members."

In addition to this, PwC partner and senior pensions adviser, Stephen Soper, described the guidance as a “game changer”, stating that the advent of consolidators is the “beginning of a significant phase of innovation” in the DB space.

He stated: “The ability for employers to restructure and separate from their pension scheme in a solvent way is a transformational advance in regulation.

“Consolidation leverages the capital markets to offer trustees a more predictable outcome and a greater chance of paying members full benefits over time.

“I expect pension schemes that traditionally have been too large to buyout will also consider ways to access third party capital made possible by these regulations. Our analysis shows that up to one million pension scheme members and £170bn in assets could transfer to superfunds within the next 10 years."

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