News & analysis
THE PENSIONS REGULATOR PAVES THE WAY FOR NEW DB SCHEME SUPERFUND REGIME
The regulator has given DB trustees another option when looking to de-risk their scheme. Mona Dohle reports.
The Pensions Regulator (TPR) has created a temporary frame- work of rules for the consolidation of defined benefit (DB) schemes in so called “superfunds”, therefore offering an alter- native to an outright buyout. In the absence of a permanent regime for DB scheme consoli- dators, the new interim guidance put forward by the regulator will enable consolidator firms, such as The Pensions Superfund and Clara, to strike more direct conversations with sponsors about offloading their obligations to a consolidator. Indeed, Clara hopes that this happens in the next six months as it has announced its intention to complete its first set of trans- actions by the end of this year.
A framework of rules in some form was needed. Buyouts are currently regulated under Solvency II legislation and the insur- ance companies that facilitate them must pass stringent capital requirements, but DB scheme consolidators are not subject to these processes and rules. Moreover, they fall under The Pension Regulator’s supervision, rather than that of the Prudential Regulation Authority, as insurance companies are. There are currently 5,436 DB schemes in the Pension Protec- tion Fund’s (PPF) universe, managing some £1.6trn in assets. The emerging superfund market has a big pool to fish from with only 11% of final salary schemes being open to new mem- bers, according to the PPF’s 2019 Purple Book. Under the new interim guidance, superfunds would be expected to provide employers handing over their obligations with a transparent overview of their fees, funding and investment objectives. The superfund would also have to prove to the regu- lator that the scheme in question is PPF eligible. Capital requirements will be of pivotal importance for the emerging superfund market. As it stands, in the event of super- funds failing to hold enough cash to pay out pensions, the schemes in question would be passed on to the Pension Protec- tion Fund to manage, which would mean a potential benefit cut for scheme members. For now, the regulator has specified that the superfunds should hold sufficient financial resources to cover operating and set up charges, including the potential costs of a low-risk intervention or a wind-up trigger. TPR also stressed that financial reserves of the schemes in question should be ringfenced. Crucially, the regulator also outlined that it expected a propor- tion of those reserves to be held in cash or cash-like securities to cover short-term liability issues, similar to the rules applicable
6 | portfolio institutional July 2020 | issue 94 to the insurance sector.
While the regulator did not spell out the exact proportion of cash-like assets to be held, this requirement could put cash-flow aware investing strategies high on the agenda of DB consolidators. Passing pension scheme obligations on to a superfund could therefore be a cheaper option for scheme sponsors, who might welcome this opportunity to cut costs in financially challenging times.
It is an initiative which has been encouraged by pensions min- ister Guy Opperman, who welcomed the interim regime and pledged to continue working on a permanent framework. How- ever, in the absence of legislation being passed, TPR’s frame- work only serves as a guidance and is not legally enforceable. The push for superfunds has been received with caution by oth- ers, including the Bank of England, which warned in a paper last year about the risks of subjecting superfunds to less strin- gent standards than the insurance industry. “Government risk appetite for DB pension scheme consolidator failure may be higher than the government’s risk appetite for insurance firm failure,” it said in a note.
The Association of British Insurers criticised TPR’s guidance as
“light-touch and short on detail”. Yvonne Braun, director of pol- icy, long-term savings and protection at the Association of Brit- ish Insurers, warned that it is hard to see how trustees could be comfortable with passing assets on to a superfund and said that the interim guidance risked pension savers being sold down the river. Critics also point out that superfunds are for-profit enterprises backed by private equity firms, such as Disruptive Capital and Warburg Pincus in the case of The Pension Superfund, or TPG Sixth Street Partners in the case of Clara.
Their short-term financial interests could cause a clash with the long-term interests of scheme members, who above all would want to ensure that their pensions are being paid on time and in full.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
