Feature – Superfunds


Both are pension providers, not insurers, and as such they are not subject to the stringent capital and investment requirements of Solvency II. Because superfunds operate as pension funds, there is no legislation which sets standards on their capital requirements or investment strategy. The issue of superfunds has not been tackled in the current Pen- sion Schemes Bill, which means it could take several years until legislation is approved. The Pensions Regulator (TPR) aimed to tackle this lack of regulation with an interim guidance in June. But is it working?


Interim guidance Market watchers are divided on this. The interim guidance spells out that trustees attempting to transfer their assets should, along with the superfund, approach the regulator first. Superfunds must also hold a capital buffer, and, unlike insurers, they cannot distribute profits to investors for three years. The Pension Superfund and Clara have welcomed the new guidance, as it provides the certainty needed to convince trustees to hand over their assets. Lincoln Jopp, a director at The Pension Superfund, believes that it could be a much needed kickstart. “We have not officially completed any transfers yet because we had to wait for the framework to be published. “We expect TPR to issue a statement saying that they have finished their assessment of The Pension Superfund and that we can do deals,” he adds. “We could have done deals last year, but we knew realistically that it made sense for the regulator to finish their assessment because it would be more difficult to convince trustees.” His colleague Barker addresses the criticism from the insur- ance industry by arguing that in some ways, rules for super- funds are stricter. “Insurers are right in that this isn’t a level playing field. “If you do the maths on their one-year test versus our five- year test, they have to hold less capital than us,” Barker says. “For the schemes in PPF assessment, insurers can cut mem- bers’ benefits unilaterally in securing them, but superfunds cannot.” Hughes believes that the interim guidance is insufficient. Her concern is that the policy is targeting well-funded schemes. “That is where the risk of regulatory arbitrage becomes more acute,” she adds. “The regime doesn’t need to be Solvency II compliant as it is trying to serve a market that can’t afford a buyout, but that doesn’t mean the regime doesn’t need to have similar fea- tures to Solvency II. “For example, the life insurance industry has undergone


44 | portfolio institutional August 2020 | issue 95


By underwriting superfunds with the PPF, you are potentially privatising the gains and


socialising the losses. Hetty Hughes, Association of British Insurers


stress tests recently, where they have to measure the impact if half their assets’ credit rating were downgraded. This was found to be manageable, whereas TPR guidance simply says that superfunds can do their own homework and come up with their own stress tests,” she adds. Similar concerns have allegedly also been raised by Bank of England governor Andrew Bailey, who in a letter to Work and Pensions Secretary Thérèse Coffey leaked to Sky News, warned that the lack of firmer rules in TPR’s interim guid- ance could pose a risk to financial stability. The Bank of Eng- land was approached by portfolio institutional but chose not to issue a public comment. Critics of superfunds are also worried about consolidators being funded by private equity firms.


The regulator imposing a three-year ban on passing profits to investors, is still insufficient, argues Hughes. “We might not see legislation for another five years and the guidance also says that the three-year rule is under review. What it doesn’t say is that there are other ways of extracting value other than dividends. Performance fees and management fees are examples of the instructions private equity firms tend to put in place.” Chris Clark, defined benefit policy lead at The Pensions Reg- ulator, says that superfunds should not be compared to


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