News & analysis
TPR TRUSTEE GUIDANCE: SUPERFUNDS SET TO CARVE NICHE IN CONSOLIDATION MARKET
The regulator has issued guidelines for trustees considering transferring their assets to a so-called superfund, but what could the implications be for the DB consolidation market?
Rising maturity amongst defined benefit (DB) schemes, weak- ening sponsor covenants and investment challenges have led to the creation of new de-risking option for trustees – pension scheme consolidators, which have been branded “superfunds”. Two years ago, insurance-led bulk-annuity deals were the main option for trustees of DB schemes wishing to off-load part of their obligations. And demand for it has grown rapidly. Between 2018 and 2019, bulk annuity transactions involving UK pension schemes have almost doubled to £43bn from £24bn, according to Aon. But the pace of this growth slowed dramatically in the first half of 2020 to £12.7bn, and not just because of the volatility in pricing sparked by the pandemic.
Competition ahead? Meanwhile, superfunds have positioned themselves as an alternative to insurance-led de-risking deals. In theory, they should not directly compete with buyouts or buy-ins, which The Pensions Regulator (TPR) describes as the “gold standard” for securing members benefits, as they are aimed at mature schemes close to being fully funded.
In contrast, the superfunds say they are targeting a different spectrum in the market, schemes which are not fully funded and cannot afford an insurance deal. But in practice, this dis- tinction is far from clear, as the increasingly fierce tone between insurers and the new consolidators illustrates. The insurance industry objects to having to comply with relatively stringent Solvency II liquidity requirements, while the new consolida- tors do not. In June, TPR attempted to fill this gap by publishing initial guidelines for superfund providers which set out the standards private capital-backed consolidators should meet for trustees and scheme sponsors to consider transferring their assets. While the regulator has been careful to avoid the impression that it approved the launch of individual consolidators, these guidelines are widely seen as a launchpad for superfunds and trustees to enter negotiations about potential transfers. And demand for the consolidators is growing. One in five DB schemes have considered superfunds as a potential exit route, a survey by Willis Towers Watson found. A spokesperson of one consolidator, The Pension Superfund, told portfolio institu- tional in early 2020 that it was in negotiations with several schemes to transfer of several billions of pounds worth of assets. Simultaneously, in recognition that demand from trus-
6 | portfolio institutional November 2020 | issue 98
tees is growing, TPR has offered further guidance for trustees and scheme sponsors who are considering transferring their assets. Has it helped to provide further clarity?
Guidance for trustees - key elements In the new guidance, published on the regulator’s website on 21 October, TPR made it clear that it intends to publish a list of approved superfund providers, a process aimed at assisting trustees in their due diligence assessments of a superfund. “Trustees can take some comfort from our assessment - we do not expect trustees to replicate it,” the guidance said. For trustees considering superfunds as a potential exit route, TPR has spelt out three gateway principles. The first is that a transfer to a superfund should only be considered if the scheme cannot afford to buyout. Second, a transfer to a superfund should only be considered if a scheme has no realistic prospect of buyout in the foreseeable future, given potential employer contributions or insolvency risk of the employer. Thirdly, a transfer to a superfund must improve the likelihood of members receiving full benefits. For Claire van Rees, a partner at Sackers, these three gateway principles combined with the clarification on trustees’ due dil- igence mean that the new guideline should fill an important gap for those considering a transfer.
Insolvencies - a stepping stone for Superfunds? Another key element of the new guidance is that it leaves the door open for schemes whose sponsor is facing insolvency to transfer their scheme obligations to a superfund. For Mike Smedley, a partner at Isio, this could have far reach- ing implications in the current economic climate. “We expect most of the superfund deals in the next six to 12 months to be insolvencies, where trustees will look at superfunds as an alter- native to insurance in reducing members’ losses. A 10% 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,” he predicts. But the insurance industry and providers of conventional buy- out strategies remain unconvinced that TPR has tackled the potential conflict of interest, as Tracy Blackwell, chief executive of the Pension Insurance Corporation, spells out: “This guid- ance places a significant onus on trustees to carry out extensive due diligence on the employer, on the superfunds, their asset strategies and the current and possible future regulatory regimes that they may operate in.
“Whilst this reduces the risk that protection for scheme mem- bers is compromised, the interim superfund regime still places the interests of corporate sponsors over those of members; it promotes the idea of reducing corporate costs by reducing the protection for pensioners,” she warned.
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