On December 7, 2018, the DWP published its consultation paper on DB consolidation vehicles or “superfunds”. The consultation period runs until February 1, 2019. TPR has also issued guidance for trustees and, separately, for employers considering transfers to the new arrangements.
The DWP consultation
The DWP’s consultation seeks views on a new legislative framework for authorising and regulating defined benefit superfund consolidation schemes – “DB superfunds” - as described in its White Paper “Protecting defined benefit pension schemes”, published in March 2018. It gives an indication of the Government’s policy intentions and likely focus of the legislation.
The proposal is to consolidate DB occupational pension schemes into superfund entities, so that they benefit from improved funding, economies of scale and better governance, and thus will hopefully provide more security for members of DB pension schemes.
In the DWP’s view, the advantages of superfund schemes are that they:
- protect savers through a capital buffer, which will provide greater security by reducing the risks associated with future employer insolvencies;
- provide an alternative way for employers in certain circumstances to separate themselves from legacy pension arrangements by moving closed pension schemes into a superfund, freeing them to focus on the day-to-day running of their business;
- improve the likelihood of members’ benefits being paid in full; and
- enable access to a wider and potentially more innovative mix of investment opportunities.
The DWP proposes a “gateway” approach to enable it to assess which schemes enter a superfund and an authorisation regime to ensure an effective supervision structure. The intention is to define superfunds as DB occupational scheme vehicles with the express purpose of consolidating liabilities. The employer link would be severed and a capital buffer would be provided by external investment acting as a covenant. However, the consultation makes clear that it is not the intention for a DB superfund to provide the same level of security as a regulated insurer. Developing a regulatory regime to safeguard financial sustainability is likely to prove the biggest challenge. There are also plans for a mechanism to be put in place so that benefits are paid directly to members.
TPR’s authorisation and supervision
The proposals are for DB superfunds to apply for TPR authorisation and to meet regulatory criteria similar to those in place for master trusts. For example, criteria will need to be met in relation to trustees being “fit and proper persons”, and for the superfund to evidence that appropriate administration, governance and investment arrangements are in place.
As regards the DWP’s “gateway” approach to assessment, TPR will look at the “gatekeepers” – that is, the trustees – to ensure that the correct actuarial, covenant and legal advice is taken and that a transfer to a superfund is in the members’ best interests.
TPR states that it will assess any proposed transfer to a superfund on an individual case-by-case basis while the consultation on the authorisation and supervisory regime is ongoing.
The Government’s view is that well-run superfunds have great potential to deliver more secure retirement incomes for workers while allowing employers to concentrate on running their businesses. However, the new regime will need proper regulation, and it is essential that robust authorisation and supervision controls are established.
Many in the pensions industry have welcomed the prospect of DB superfunds and have stated that they will provide a much needed new option for many schemes, especially those with weaker employer covenants.
However, some potential limitations of commercial DB consolidators have been noted, and it is essential to ensure that governance was tight enough to prevent employers regarding a superfund transfer as a cheap way for employers to sidestep their pension responsibilities. A cautionary note was also sounded in relation to the new regulatory regime, which needs to ensure prudent behaviour, but not be so stringent that it forced superfunds, in effect, to become insurance companies, which would make their existence pointless.