The Pensions Regulator has issued guidance for supervising the commercial consolidation of defined benefit (DB) pension schemes into Superfunds. Consolidation into "Superfunds" may be an attractive option for employers wishing to discharge their pension obligations where the cost of a traditional buy out with an insurance company is beyond reach. After transfer to a Superfund the link with the employer will be severed. At the same time, a Superfund is expected to provide a robust level of security for members' benefits.
Inevitably, commercial Superfunds will create tension between the interests of members and those who operate the Superfunds for financial profit. This conflict needs to be carefully managed and the Regulator's proposals (rightly) put members' interests above those of the financiers.
Modelling for the Regulator predicts a very high probability (99%) that Superfunds supervised under the new regime will be able to pay all members' benefits in full. The new regime will achieve this by requiring:
- the transferring employer to pay a final contribution (if needed) to reach the required funding level for transfer to the Superfund;
- Superfunds to be well funded on a prudent basis;
- additional funding (a "capital buffer") to be provided by the financiers, which can be accessed to fund members' benefits if certain triggers are met; and
- Superfund investments to be spread over a range of assets with regular monitoring of ongoing funding levels by the Regulator.
Trustees of schemes asked to agree to a transfer to a Superfund should take specific legal and covenant advice to make sure that the transfer would be beneficial for their members and that an insured buy out is beyond reach. The Regulator expects to be involved in both the transfer process (requiring formal clearance) and the ongoing supervision of Superfunds, which will assist trustees and should give reassurance to the transferring members.
For more details about the Regulator's expectations of Superfunds please click here.
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