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DB superfunds guidance


This guidance is for those setting up and running a 'DB superfund', including directors, senior managers and trustees. This guidance may also be relevant to other alternative arrangements developing in the market. We expect proposers to liaise with us early to see whether this guidance applies to them. 

Revised: August 2023

We have amended this guidance in line with our commitment to review our position within three years of publication. This revised version includes:

  • an updated position on profit extraction
  • an increased discount rate
  • further clarification on aspects of our assessment process (including collective competence and a new appendix which consolidates information on supervision)
  • general clarification in light of feedback from stakeholders and our experience in operating the regime

Please also note there has been an amendment concerning an extension of the gateway in our superfunds guidance for prospective ceding trustees and employers.

  • In its March 2018 white paper, the government announced its policy intention to increase the protections for defined benefit scheme members and make improvements to the system.
  • In December 2018, the Department for Work and Pensions (DWP) published a consultation paper setting out its plans for an authorisation and supervision framework in relation to these new models, known as superfunds.
  • We published our first set of guidance in 2018, which provided clarity on our expectation ahead of new legislation coming into force and before the market had started to develop. Our guidance was largely based on the proposals set out in the DWP’s consultation.
  • We committed to updating our guidance as the market developed and where we believe extra clarity was needed.
  • Our further targeted engagement at the end of 2019 explained how the capital adequacy, value extraction and investment principle requirements had been developed. We described our proposals in relation to these specific issues, and we also consulted with a number of interested parties about how we intended to operate our existing powers to regulate superfund activity. We updated our guidance accordingly, with publication of amended guidance in June and October 2020.
  • We have now amended this guidance again in August 2023 in line with our commitment to review our position within three years of publication. This follows a focused engagement with key stakeholders, which has informed the changes we have made. The revised version includes an update on our position on profit extraction, changes to the discount rate and the gateway process, as well as amendments to reflect market changes and clarification in some areas, based on feedback, and on our experience in operating the regime.
  • The DWP published its response to the Consolidation of defined benefit pension schemes consultation on 11 July 2023. The DWP expects to continue working on the detail to progress the permanent legislative regime.

1. Introduction

1.1 Purpose of this guidance

This guidance is for those setting up and running defined benefit (DB) superfund vehicles, including directors, senior managers and trustees. There are other arrangements emerging in this dynamic developing market and we will continue to engage with the proposers of these arrangements to consider whether aspects of this guidance are applicable. We are developing separate guidance, aimed at DB schemes and DB sections of hybrid schemes that may be considering alternative options. Our intention is for that guidance to set out some of the key issues those schemes may wish to consider when looking at different alternative arrangements. We will also share any developments and our thinking with the DWP to assist with future legislation.

1.2 What is a superfund?

A superfund is a vehicle that, upon entry or at some point in the future, allows for the severance or substantial alteration of an employer’s liability towards a DB scheme, or the DB section of a hybrid scheme, and where one of the following conditions applies:

  • The scheme employer is replaced by a special purpose vehicle (SPV) employer. This is, to all intents and purposes, a shell employer and is usually put in place to preserve the scheme’s Pension Protection Fund (PPF) eligibility.
  • The liability of the ceding employer to fund the scheme’s liabilities is replaced by an employer, backed with a capital injection to a capital buffer (generally created by investor capital and contributions from the original ceding employers).

The replacement employer, backed by a capital buffer, will usually support a consolidator scheme. Some of the important features of a consolidator scheme are as follows:

  • A bulk transfer of a ceding scheme’s liabilities to a consolidator scheme, which is prepared to accept the liabilities of a number of schemes from unconnected ceding employers.
  • It will have its own governance and administration (these functions may be in-house, or outsourced).
  • There will usually be one trustee board.

If a scheme is transferred to an arrangement where the original employer could be replaced at some point in the future, arrangements should be put in place to ensure that our guidance can be followed when the replacement occurs.

All potential superfunds should liaise with us early to see whether our guidance applies to them. 

1.3 Terms used

Capital buffer: the capital provided by either the investors, or both ceding employer and investors, which supports the replacement of the ceding employer. It is not a scheme asset but is available to the trustees of the scheme in specified events.

Ceding employer: sponsoring employer of the ceding scheme.

Ceding scheme: scheme from which members, assets and liabilities have been or will be transferred to the superfund pension scheme.

Ceding trustees: trustees of the ceding scheme.

Corporate entity: the entity that runs and/or governs all aspects of the superfund, other than the pension scheme.

Pension scheme: the pension scheme or schemes (if sectionalised) within a superfund.

Sponsoring employer: the part of the superfund that assumes the role of sponsoring employer for the liabilities transferred into the pension scheme.

Superfund: the overall structure of the vehicle, including the corporate entity, the sponsoring employer, the pension scheme and the capital buffer.

Triggers: Low-risk trigger: total assets, ie scheme assets plus risk-based capital buffer assets being equal to 100% of our minimum technical provisions (TPs) level. Wind-up Trigger: 105% of the s179 funding level under the 2004 Act, unless otherwise agreed by us in exceptional circumstances.

Trustee(s): the trustees of the superfund’s pension scheme. They have the same responsibilities as trustees of any similar occupational pension scheme (for example, the trustees are required to monitor the scheme’s funding level, commission regular actuarial valuations, and supervise the scheme’s administration and payments).

1.4 Why do superfunds require specific guidance?

These are new entrants to the occupational pension scheme world. They bring their own benefits. They also bring challenges.

Superfund vehicles can be complex and can include numerous entities with different flows of obligation and benefit. They will rely on unconventional structures to support the replacement of the employer’s covenant. For example, the capital buffer replaces the ceding employer’s covenant and, while it is not an asset of the pension scheme, forms part of the longer-term security of the scheme, which can be called upon when needed. It is essential that the assets in the capital buffer are invested in a manner appropriate for the pension scheme because the buffer may be called upon (and the buffer assets may need to transfer) to provide support for the scheme. There is no specific re-capitalisation requirement for superfunds during the interim period.

We expect that trustees will gain full control of the assets if the funding level falls below a low-risk funding trigger level. However, it is possible that trustees may gain full control, or a degree of control, earlier than this in some superfunds, as the funding level falls towards the low-risk funding trigger.

There are risks while the superfund market develops. During the interim period, as different superfund models emerge, we need to be mindful that some models may not get market support, may not achieve critical scale, may fail or may decide to exit the market. We want the investments held by the pension scheme and the capital buffer to be appropriate (and realisable or transferable for full value) to enable 100% of members’ benefits to be protected to a high degree of certainty.

It is for these reasons (which are more fully set out in our 2020 DB superfunds consultation response) that we have taken the view that superfunds need their own tailored guidance.

1.5 Scope of this guidance

This guidance focuses primarily on how trustees of a superfund’s pension scheme should approach managing the funding and governance risks associated with being part of this model. This guidance also contains important information for those setting up and running a superfund, including directors and senior managers. It is not exhaustive, and we may expect trustees to take further steps to meet the systematic risks that emerge.

The market for superfunds has evolved since the DWP’s consultation in 2018 and our experience since then. We published our first set of guidance in 2018, which provided clarity on our expectations ahead of new legislation coming into force and before the market had started to develop. Our guidance at that time was largely based on the proposals set out in the DWP’s consultation. Our further targeted consultation at the end of 2019 explained how the capital adequacy, value extraction and investment principle requirements had been developed. This guidance contains what we believe to be the appropriate expressions of how the investment duties in the investment regulations, the trustees’ funding requirements and other governance requirements should apply to superfunds. The other aspects of this guidance set out how existing governance expectations have been adapted to apply to a superfund’s circumstances.

Some business models do not offer services beyond those required for capital adequacy purposes and do not plan to consolidate schemes. There is no change to the pension scheme in terms of trustees or the level of the control they have over governance and other management and administration aspects. In these scenarios, it may not be necessary to apply all the additional expectations that our guidance sets out for superfunds beyond capital adequacy.

We outline and indicate how we may adapt our expectations as the superfund builds itself up and before it begins to transact. For example, when a superfund first notifies us that it wishes to enter the market, we will provide further detail of the regular reporting we expect (including what information and at what intervals) and we will engage with them on the extent to which processes and obligations to support this reporting should be incorporated in its governing documentation.

A superfund’s pension scheme should still comply with all relevant codes and guidance.

1.6 Our use of this guidance

Our guidance is not prescriptive. However, it is clear and directive about the steps trustees should take to manage the risk within the superfund model. We are open to considering other ways trustees can demonstrate they meet our expectations. If trustees are unable to demonstrate to us that they have a satisfactory alternative means of meeting our expectations, we will rely upon this guidance in any regulatory action.    

Employer severance is still a ‘Type A event’ under our clearance guidance and nothing in this guidance affects our ability to use our moral hazard powers.

1.7 Date of application

This guidance covers all superfunds except SPV arrangements that were put in place before or since the publication of the version of this guidance dated 18 June 2020. 

1.8 Background

The DWP continues to develop an authorisation and supervision framework to safeguard the benefits of members moving into superfunds. It is envisaged that superfunds will need our authorisation to operate once any new framework is in place. Further information can be found in the DWP’s consultation response.

Until a legislative regime is in place, superfunds will continue to operate under our interim regime. Our focus in assessing superfunds under the interim regime is on whether:

  • the superfund is capable of being supervised by the trustees
  • the superfund is run by fit and proper persons with effective governance arrangements in place
  • the superfund is financially sustainable and has adequate contingency plans in place to manage funding level triggers, as well as to ensure an orderly exit from the market
  • the superfund has sufficient administrative systems and processes in place to ensure it is run effectively

2. Regulation before a legislative authorisation framework is in force

We will be regulating superfunds before a legislative authorisation framework is in place. Our aim is to ensure members’ benefits are protected (while the superfund is ongoing and if it exits the market) given that we currently see funding, personnel and governance as potential risks.

One of the defining characteristics of a superfund is the replacement of the employer. Where the employer is supported by a capital buffer (and it meets our expectations), we consider such capital to be a proxy for the employer covenant. The level and quality of the assets in the capital buffer are, therefore, fundamental to the success of this type of superfund. Member outcomes will be dependent on the success of not just the pension scheme, but also the capital buffer. Accordingly, it is important that:

  • the pension scheme and the capital buffer meet our requirements
  • the key individuals who exert financial control over and/or influence the superfund’s strategies (for example, those of the corporate entity, and the trustee board) and those that have control over the assets should be fit and proper, including being financially sound
  • the governance, systems and processes associated with the capital buffer and the scheme are adequate

Although there is not yet a specific legislative authorisation framework for superfunds, we would emphasise that all our existing powers over occupational pension schemes remain available to us. As we are particularly concerned to ensure that the funding, personnel and governance of a superfund are fit for purpose, the powers most obviously relevant are section 7 of the 1995 Act (trustee appointments) and section 231 of the 2004 Act (funding powers). Any potential use of powers will depend on the specific circumstances, and we do not rule out consideration of other powers.

During this period, our assessment against our expectations should not be used as evidence for any other purpose, including any statutory or regulatory processes that may be introduced in the future for superfunds. It is envisaged that superfunds will need our authorisation to operate once any new legislative framework is in place.

Our approach to the regulation of superfunds in this period will be by applying our expectations consistently across all the market entrants. We have developed tools to allow us to independently and consistently assess the risks to members’ benefits.

2.1 The assessment process

2.1.1. Superfund application process

Before you apply

  1. If you are considering setting up a superfund, we recommend that contact us as soon as possible at so we can discuss whether any part or all of our superfund guidance applies.
  2. We’ll ask you to talk us through your model at a high level.
  3. We’ll send you a series of information requests setting out the details of the information we expect, including documentation and supporting evidence, to demonstrate how you have met the criteria set out in the superfund guidance.
  4. The expectations we set out in the guidance will help you prepare for this application.

The application

  1. You will formally submit the superfund application with full and complete information demonstrating how you have met the criteria set out in the guidance.
  2. Once we are satisfied that we have received a full and complete application, we will inform you that the assessment process has started.

The assessment process

  1. We will assess your superfund application against the expectations set out in the guidance.
  2. We will contact the superfund, scheme trustees or specific individuals directly if we wish to discuss or clarify the information provided – with an agreed agenda – throughout the process.
  3. We will produce a report with a recommendation relating to our assessment of the superfund application.
  4. The decision-maker will then assess the application, based on the assessment team’s report.
  5. The decision-maker may ask for additional information at any point before it reaches its decision.

After the decision

  1. We’ll inform you of the high-level decision shortly after the date the decision has been made.
  2. We’ll send you a detailed feedback letter outlining the rationale for our decision.
  3. We will offer you a meeting to clarify any points from the letter that you wish to discuss.
  4. If the application is successful, we will publish the superfunds name on The Pensions Regulator (TPR) website.

This guidance sets out a number of expectations against which we will assess a superfund. We expect superfunds (including trustees) to explain how they meet these in their application for assessment. This will involve submitting full and complete information demonstrating their approach to addressing the areas outlined below. Once we have received a complete application, we will inform the superfund applicant that the assessment period has begun from the date the application was submitted. If we identify gaps in the submission, we will notify the superfund. In those circumstances, we may pause the assessment process until the full and complete information has been submitted.

Our assessment comprises a review of our expectations set out in the areas of the guidance outlined below and a contextual assessment of relevant evidence in relation to it:

  • People
  • Governance
  • Systems and processes
  • Financial sustainability

Financial sustainability includes mechanisms and processes in respect of business plans, costs, assets and liquidity plan, capital adequacy (ie assets against liabilities), investment governance, and risk management.

We expect a full and complete suite of a superfund’s governing documentation and arrangements to be submitted as part of the application for assessment.

We also expect the superfund’s documentation to set out clearly how it meets our expectations in relation to, for example, our capital adequacy triggers and the prevention of value leakage from the capital buffer.

In support of the application, we expect superfunds to provide a supporting narrative to the submission with clear signposting to evidence, such as relevant key documents and summaries of content.

The time taken for our assessment will depend on the complexity of the superfund’s arrangement as well as the quality and breadth of the information provided. We would, therefore, recommend that superfunds approach us at an early stage, so we can discuss our expectations. At this point, we will provide superfunds with information requests setting out the details of the information we will expect. This will include forms, templates and questionnaires for prospective applicants to complete.

During this assessment, it is likely we will wish to clarify the information provided, so we may engage with the superfund or a specific individual. If there is any additional information you wish us to consider, you should send it to us as soon as possible.

Our expectations and the information we will consider as part of the assessment, set out below, should help superfunds prepare for this assessment.

3. Our expectations and information we may request

We set out below the information we expect superfunds to provide as part of our assessment.

3.1. Key points to consider

As part of our assessment process, we will ask superfunds to:

  • provide evidence confirming the pension scheme is registered with HMRC
  • provide an explanation as to why they consider the pension scheme is PPF-eligible

Superfunds should address these two points at an early stage.

4. People

We need assurance that the key people running the superfund are fit and proper. This means they can carry out their roles competently, and with honesty and integrity.

We expect those carrying out certain key functions in the superfund to demonstrate that they have the right level of knowledge, skills and experience to carry out their role. We also expect them to have an appropriate level of propriety (ie honesty, integrity, financial soundness, and conduct and competence) for the role.

4.1. Role identification

The roles we will assess are key to ensuring that the superfund is adequately funded and financially sustainable, well-resourced and well-governed. They will also ensure that compliance, investment and operational risks are appropriately managed and member interests protected.

We will provide superfunds with a role identification form, where they should identify the individuals carrying out these functions/responsibilities:

  • The trustees and trustee directors making up the trustee board.
  • Who established the superfund (the founder).
  • Those responsible for the overall management and conduct of the key operational decisions of the superfund (for example, the Chief Executive Officer, executive and non-executive directors).
  • Those responsible for key business areas (we would expect this to include the Chief Operating Officer and heads of key business functions).
  • Those responsible for the overall management of financial resources (for example, the Chief Financial Officer).
  • Those responsible for the overall management of risk within the superfund (for example, the Chief Risk Officer).
  • Those responsible for the investment decisions and their implementation for the fund and/or capital buffer (this will likely include the Chief Investment Officer). We may also ask about those responsible for setting the investment strategy of the pension scheme and the capital buffer, those with overall responsibility for the performance of the investment strategy, and those responsible for the systems and processes and implementation of the investment strategy.
  • Those responsible for the overall management of internal audit and compliance. (This is likely to include the Chair of the Audit Committee and Head of Internal Audit).
  • Those who can appoint or remove trustees (this is likely to include the Chair of the Appointments Committee).
  • Those who can alter trust deeds.

The identification form also includes a section for the superfund’s explanation of the process it followed in identifying these individuals. We expect superfunds to provide a structure chart setting out the different areas and accountabilities within the superfund. This should cover the corporate side of the superfund as well as the trustee’s side. The structure chart should indicate where each of the roles identified in the role identification form sit within the superfund and how they relate to each other. Where a person is carrying out more than one role, this should be indicated on the structure chart.

Superfunds are also expected to provide a role statement setting out the relevant responsibilities and accountabilities attached to the role.

For the avoidance of doubt, when considering an application we will assess whether there are other individuals who are undertaking the roles mentioned above, even where these individuals are not identified in the application.

We understand that new superfunds may not have reached scale and may have outsourced certain functions or not filled others. Superfunds will be expected to indicate whether, and if so when, they intend to bring outsourced functions in-house or to recruit to vacant roles, and how the function is being carried out in the meantime. As with any scheme, outsourced functions should always be subject to appropriate oversight and assurance.

4.2. Assessment of fitness and propriety

4.2.1. Individual competency

To carry out our fit and proper assessment, we will ask the individuals identified in the role identification form to complete an individual fit and proper form. This will provide information about each individual’s employment history, business interests, professional qualifications and experience, and other matters relating to their honesty, integrity, financial soundness, conduct and competence. The form asks for the individual’s personal information, including date of birth, National Insurance number, current address and previous addresses over the last five years.

If it is not possible to provide the information requested (for example, the information does not exist or is not relevant), this should be clearly explained in the form.

Individuals will need to obtain and provide us with a basic disclosure level criminal conviction certificate, which will be a basic DBS certificate for UK residents. If they have lived in a country outside the UK for more than six months during the last five years, they will additionally need to provide an equivalent criminal conviction certificate for that country. We are happy to discuss this with the individual first, to ensure they apply for the correct certificate in the relevant jurisdiction. We cannot accept black and white versions of the certificate.

Those individuals who are members of a professional body or who are accredited, approved or authorised by a professional body or a regulator[1] should also provide us with a certificate of good standing or equivalent written confirmation from that body or regulator, dated within the previous three months.

If there are any difficulties or delays in obtaining criminal conviction certificates or certificates of good standing, individuals should contact us to discuss.

The information requested from individuals and the superfund is the minimum necessary to assure us that key roles (linked to the security of member benefits) are held by fit and proper persons.

Individuals should send the information requested on the individual fit and proper form directly to us (contact details are on the form). Once we receive the information, we will conduct our own checks and searches, and may request validation or supplementary information from government departments or other public bodies. These will vary according to the nature of the information provided in the forms.

Once we have assessed all relevant information, we will determine whether there are any concerns that mean we cannot be assured that the individual is fit and proper to carry out their role in relation to the superfund. We will discuss any concerns in confidence with the individual in the first instance. This will give them the opportunity to explain or provide context or additional information. If we remain dissatisfied, we will raise the issue with the trustees and CEO of the superfund, or relevant senior manager, with a view to resolving our concerns. If our concerns remain at that point, subject always to the nature and severity, we will consider exercising any relevant powers in relation to the superfund or the trustees.

Should any material information provided to us for the assessment change during or after the assessment, or circumstances arise that would have changed the information provided (for example a new criminal conviction), the individual or superfund should let us know as soon as possible. We may require further information at that point, for example a new criminal conviction certificate. We will then consider whether this affects our assessment, and we may need to do further checks or searches as a result. If we are not assured that the individual remains fit and proper, we will follow the above process of raising with the individual first, and then the superfund if necessary.

4.2.2 Collective competence

We expect superfunds to provide us with evidence demonstrating the collective competence and experience of their corporate and trustee boards in the context of that superfund’s business model. This could be presented as a skills matrix with supporting narrative. It may include examples of function holders demonstrating how they have used their skills, knowledge, and experience in practice. It may also include evidence such as board or meeting minutes. We would expect to see an assessment of skills, knowledge, experience and any gaps, together with training plans to deal with such gaps, a plan to ensure that collective knowledge and skills are maintained, and details of consideration of succession planning.

Footnotes for this section

  • [1] We do not require certificates from the BSB, FCA, PRA or SRA for the assessment process.

5. Governance

Decisions made by the corporate and trustee boards will have a direct impact on member outcomes. We therefore expect superfunds to demonstrate that their corporate board and trustee boards are well-governed, with appropriate checks and balances in place. The collective breadth of knowledge and experience on the boards has to be appropriate to govern the superfund. We expect clear and open communication between corporate and trustee boards and committees, and that superfunds have in place a clear and comprehensive documented process dealing with disputes.

We expect the corporate and trustee boards to identify potential or actual conflicts of interest at an early stage, and to provide us with a clear and comprehensive policy to deal with conflicts of interest, both at an individual and group level, including whether membership of any corporate group constitutes a potential conflict.

Trustees should be mindful of any potential conflicts of interest that may arise due to their own involvement in the early stages of development, establishment and promotion of the superfund. They should also be aware of the level of influence and any other roles their advisers may hold, which may create a potential or actual conflict for these advisers.

We would expect the relationship between the superfund and the pension scheme to be clearly documented to provide clarity around the roles and responsibilities of the respective corporate and trustee boards.

We expect superfunds to have a robust approach to governance, both when setting up and running their corporate and trustee boards, and to comply with relevant sections of the UK Corporate Governance Code, including:

  • having an open, rigorous and transparent appointment process with an effective succession plan
  • having a clear division of responsibilities between the leadership of the trustee board and the executive leadership of the superfund
  • regularly reviewing the roles of the superfund and trustee board members as well as their composition

Trustees should also have a clear, documented process for obtaining and addressing members’ views, including complaints.

We expect superfunds and their trustees to have robust risk management practices in place, to identify and actively manage governance-related risks, including fraud, cyber-crime, business continuity and compliance with regulatory duties.

A key area of governance in superfunds is the arrangements and processes used to ensure robust oversight of investments, along with the processes for assessing and controlling risk in this area. Consequently, we may ask for further details in relation to investment governance, including the structure of these teams, roles and responsibilities, and the key decision-makers involved in investment, risk management and liability management arrangements. Further guidance regarding investment risk management can be found later in this document, and on the Integrated risk management section of our website.

Details around the investment governance structures could be provided by way of an organisational diagram with an accompanying narrative explanation and the terms of reference for these teams and committees, including details of any discretion(s) they may have.

We may also request details of any incentives structure for managers, key decision-makers, employers or trustees, and details of performance-related fee structures relating to any assets under management and how they have been set.

Where a partnership structure is proposed as part of the corporate entity, we expect superfunds to provide a clearly documented rationale for the use of such a vehicle.

6. Systems and processes

For a superfund to run effectively, it needs robust and effective administrative systems and governance processes.

While we recognise that a superfund will not yet be transacting, and, therefore, will not have a full administrative function in place before submitting its application to us for assessment, we will expect its systems and processes to be developed enough so they can be assessed. We will need evidence to satisfy us that there are sufficient systems and processes in place, and that they will be ready to go live at the point of a first transaction.

The areas outlined below provide a high-level summary of what we will want to assess:

6.1. The standards, functionality and maintenance of the IT systems used in scheme administration

The superfund should provide information to enable us to understand how the system supports the operation of the superfund, including administration, payroll and tax functionality, and how issues arising will be dealt with, together with provision of relevant policies. This should encompass data transfer, recording benefits, calculations and payments of benefits. It should also include details of how the superfund will manage personal and sensitive data, fraud, data breaches and cyber risk. In this area, we will want to understand how the superfund has aligned with TPR’s cyber security principles for pension schemes.

6.2. The administration processes that have been developed and will be used to administer the superfund

The superfund should provide information to enable us to understand how it has satisfied itself that the processes are correct and will be maintained over time. This should include the processes for acquiring further ceding schemes, and key administration tasks such as retirements, deaths and pension increases.

Where administration or other key functions are outsourced to a third-party provider, we will ask for details of the third party, the range of tasks they undertake and the appointment and monitoring process. We will want to understand how a superfund has satisfied itself that the provider and contract/service level agreements put in place will deliver the expected service to meet their and their members’ needs, including value for money.

Whether administration is managed in-house or outsourced, we will want to understand the oversight the trustee board has, particularly in relation to reporting and escalation arrangements. We will expect superfunds to provide, or summarise, the service level agreements they have agreed with third party providers, as well as how conflicts are dealt with, the term of the contract, and how they will approach future appointments or procurement.

6.3. Member data

Complete and accurate member data is critical to good administration and valuing the liabilities of the scheme. We will ask trustees to demonstrate that they have the functionality and processes in place to manage member data at the point of transferring in, and in the future. We will also want to understand how issues identified will be dealt with and the processes for ensuring any member detriment is rectified.

6.4. Member communications

Member communication and engagement is a vital part of running a pension scheme and industry practice in this area has made many positive developments in recent years. We will expect trustees to clearly explain their approach to member communications, how they will be tested for accuracy and how they will satisfy themselves that they are effective. We will also ask trustees to set out how they will ensure members will be able to provide feedback and by which mechanism.

6.5. Member complaints

A superfund’s complaints procedure should be clearly set out and easily accessible to members. Complaints should be resolved in a fair and timely manner, with members being informed of their rights. We also expect complaints procedures to include reference to root-cause analysis of member complaints. It may be beneficial for trustees to consider how their internal dispute resolution procedure operates and whether it is relevant to their member feedback processes.

7. Superfund financial sustainability and capital adequacy

To ensure we can supervise a superfund we need to understand the financial sustainability and capital adequacy of the superfund. This involves the pension scheme, the capital buffer and the financial resources of the superfund’s corporate entity.

7.1. Superfund corporate financial sustainability

The superfund will need to ensure that it is adequately funded to enable it to be properly run and support the pension scheme. This is to cover the risks and challenges we have identified with these models. It is these risks the trustees should be alive to. This section details how these funding risks should be managed.

The superfund should have a robust business plan, and a strategy for how it will deal with an intervention trigger or wind-up of the scheme. These should be backed up with enforceable provisions in the superfund’s legal arrangements, including the pension scheme’s trust deed and rules.

The superfund should have detailed and costed plans for winding up the corporate entity , which cater for all the likely scenarios, including the pension scheme being transferred to another superfund consolidator and benefits being bought out with an insurer. These plans should include the anticipated costs of running the superfund over the period, winding up the scheme (including adviser costs), the level of liquidity within the investment arrangements that will be needed to implement the plan, and what assets will be available to meet these costs.

The corporate entity should have, or have access to, sufficient financial resources to cover the costs involved in set-up and running of the superfund, any costs it may incur, and any expected capital expenditure requirements. It should also have, or have access to, sufficient financial reserves to continue to pay the costs it may incur following an intervention trigger or the wind-up trigger (see the section on capital adequacy below), and for the entire period during which the triggering event is being resolved, or until the scheme is wound up. This should include the costs of implementing the low-risk funding trigger and running the superfund while implementing the changes that would be required as a result. We will expect superfunds to demonstrate this to us during our assessment and maintain the appropriate levels thereafter.

The corporate entity’s financial reserves should be ring-fenced, and we expect a proportion of the financial reserves to be held in cash or near cash, to address any short-term liquidity issues in the event of failure. It would be inappropriate for any proportion of financial reserves to be met by offsetting future revenue.

Where another financial regulator has responsibility for regulating the corporate entity or any of its affiliates, the superfund should make clear to us the basis on which its corporate entity’s financial arrangements with its scheme(s) have been accounted for in any capital reserves required by that regulator.

Whether a superfund is a start-up, or a new business line that is part of a well-established entity, we will need to understand the following:

  • The long-term objectives of the superfund and its business strategy, including the risks and mitigation associated with getting to scale and operating the superfund.
  • The superfund’s key commercial goals and milestones, and the implications of them being met ahead of or behind schedule, or not being met at all. This should include a clear indication of when, and on what basis, it is intended that income derived from the superfund will be used to meet the costs of the corporate group.
  • The superfund’s financial forecasts covering (as a minimum) its balance sheet, income statement and cash flow expectations.
  • How and when the superfund will receive income or reimbursement, and from whom (this should align with its policies covering fees, costs and charges).
  • How any changes to the cost of running the superfund will be addressed as it matures.
  • Details of the corporate structure of the superfund and any entities that support it.
  • Details of any debt and equity financing arrangements relating to the superfund or the entities responsible for its operation, governance, financing and administration.
  • Where any of the above information changes materially following either our assessment, or the previous supervisory review, we expect superfunds to report to us and provide us with details of how the changes continue to meet our standards, or how the superfund plans to remedy the issues. We would expect a superfund to report any change in circumstances that requires a material revision of its business strategy, any deterioration of the financial reserves held for any of the above purposes, or where it will (or is likely to) miss any of the key milestones in its business plan as submitted.

7.2. Pension scheme and capital buffer requirements

We regard the superfund’s capital buffer to be a proxy for employer covenant. One of our key aims for the interim period, is to ensure a high degree of certainty that members’ benefits will be paid. The overall level of funding and capital required is fundamental to this key principle being met. This principle also needs to hold if a superfund was to exit the market prematurely, for example if it:

  • did not achieve its business aims (for example, by not achieving sufficient scale or market traction)
  • suffered a reduction in its funding level to such extent that it triggers our intervention (for example, through materialisation of risks)
  • was unable to meet our expectations on an ongoing basis (for example, in relation to governance or conduct)

To achieve a sufficient level of member protection, we expect superfunds to comply with a range of requirements covering the following:

Capital requirements, based on:

  • the scheme’s technical provisions (TPs)
  • the amount of additional risk-based capital the superfund is required to hold in the capital buffer
  • the legally enforceable triggers a superfund should put in place

Extraction of value requirements, based on:

  • the extraction of profit from the superfund
  • the fees and expenses of the superfund

Investment requirements:

  • the investment arrangements of the scheme and buffer

Management of risk, based on:

  • integrated risk management

7.3. Capital requirements

The overarching objective of our capital requirements is for there to be a very high probability of members’ benefits being paid in full. The DWP’s 2018 consultation indicated a 99% probability as the potential benchmark. While we have carefully explored and considered a number of approaches in developing this guidance, the indication of 99% probability has guided our risk appetite when setting our requirements, due to the potential financial risk to members.

A section in a segregated superfund that wishes to transfer in a new scheme must be funded to at least the level set under our capital requirements – ie TPs plus capital buffer as set out below. A non-segregated superfund must be funded to at least this level in order to accept a new transfer. This is to ensure that the security of members’ benefits of ceding schemes is not weakened by being integrated into a superfund that is funded below our capital requirement. It also acts as an incentive for superfunds that wish to transfer in additional schemes to maintain their capital position.

Additionally, all transfers to a pension scheme must meet our capital requirements on a ‘standalone’ basis. We expect fresh capital to be provided at a level which, together with the ceding scheme assets and any ceding employer contribution, would satisfy our capital requirements if that pension scheme is considered in isolation.

A transfer of liabilities to a superfund should take place as soon as possible after the date when the amount of capital to be provided is demonstrated to meet our capital requirements. The period between demonstrating capital adequacy and the transfer taking place should not exceed nine months.

Although this intervening period could be up to nine months, we still expect our capital requirements to be highly likely to be met at the date of transfer, if reassessed at that date. The agreement between the parties should reflect this expectation. To achieve this, the agreement should include the following:

  • A mechanism that links the total amount of capital that will be provided on the transfer date to changes in financial markets between the date of the agreement and the transfer date; and
  • 'Boundary conditions’ that trigger capital adequacy to be re-assessed and the amount of capital to be provided revisited. These should trigger if financial markets change after the original agreement was struck in such a way that it is no longer likely our capital requirements will be met at date of transfer.

Or alternative clauses which achieve the same effect.

7.3.1. The TPs of the superfund must be set using assumptions that have been chosen prudently in accordance with our requirements

In Appendix A, we set out our minimum expectations for the approach superfunds should take to the key elements of setting their TPs. These cover the approach to the following:

  • the discount rate
  • inflation
  • mortality
  • commutation
  • certain demographic assumptions
  • expenses and the PPF levy

The superfund pension scheme will have to offer transfers out and make a number of assumptions in respect of them. The superfund’s scheme actuary must certify that the scheme’s TPs are no less than those calculated in accordance with these standards.

We will expect superfunds to demonstrate how their expense allowance has been calculated in line with their policies in relation to fees, costs and charges, during our assessment and on an ongoing basis.

7.3.2. The capital buffer should be risk-based and set in accordance with our requirements

The capital buffer should include the relevant and material risks that the superfund is exposed to on the asset and liability side. This must include market risks (including inflation) and longevity.

In respect of market risks, a superfund’s capital buffer must be risk-based. It will therefore need to be tailored for their scheme’s circumstances. A higher risk investment strategy would require a larger capital buffer. Further details of the modelling we expect are set out in Appendix B.

The market risk element is required to be at a level such that, when added to the scheme assets, there is a 99% probability of being funded at or above the minimum TPs in five years.

Risks within the investment arrangements of the pension scheme and capital buffer fund should not be materially increased following our assessment without the capital supporting the pension scheme being increased. This is to reflect the change in risk profile in line with the above principles.

Superfunds should inform us of any material changes (on an individual or aggregate basis) that impact the expected return or risk within their superfund. This could be the case –for example, if they were to change asset allocations or make material changes within asset/sub-asset class allocations that were covered as part of our assessment, or any supervisory review.

Following market risks, a further key risk faced by pension schemes is longevity risk. We believe that the longevity risk is most likely to manifest itself whereby the rates of future improvements in longevity are greater than those assumed. While our aim for a longevity reserve using this approach is to be consistent with the confidence level we are applying for market risks, we are aware that there is no universally agreed approach to how this would apply.

To help determine the appropriate reserve, we have reviewed the impact of applying an immediate and permanent shift to the mortality base tables, and also through applying a stochastic longevity assumption to an asset, liability stochastic model. These alternative approaches result in a reserve equivalent to broadly 3% of TPs, for a scheme made up of 50:50 pensioner and deferred members.

Based upon the above, we consider that the capital buffer should include a longevity reserve at least equivalent to the increase in liabilities caused by changing the assumption for the long-term rate of improvement in the mortality assumptions to 2% per annum. While this is expected to result in a 3% reserve, for a 50:50 scheme, in practice the reserve will be dependent on the membership profile and mortality assumptions adopted. We believe this is a pragmatic and prudent approach for superfunds.

7.3.3. There must be two legally enforceable intervention triggers that result in decisive action being taken at key points in a superfund’s funding level (triggers)

We expect these triggers to be included in the superfund’s legal documentation and will expect the trustees to provide an explanation of how they have satisfied themselves on this point.

As part of our supervision of a superfund, we will require them to report to us as they approach these triggers, and to include an explanation of what has caused their funding level to fall and how they plan to address this.

Low risk funding trigger: Set at total assets, ie scheme assets plus risk-based capital buffer assets being equal to 100% of our minimum TPs level as set out above.

At this point, in the absence of an additional capital injection, all funds in the capital buffer are required to flow into the pension scheme and come under the control of the trustees. This means the trustees have complete control over how the assets are used, the investment strategy, risk management arrangements, the implementation of those arrangements, the scheme governance arrangements (including replacement and appointment of service providers), how long they run the scheme on for, and when they will transfer members out and wind up the pension scheme.

All capital provided at the outset and any additional capital injections will be lost to investors.

Wind-up trigger: This will be set at 105% of the s179 funding level under the 2004 Act, unless otherwise agreed by us in exceptional circumstances (such as where the PPF wind-up trigger would be enacted before our low risk trigger, or the scheme experienced significantly heavier mortality than implied by s179) and where it is in the best interests of members balanced against risks to the PPF, after PPF consultation on our part. At this point, the scheme must begin winding up and members transferred out. This provides protection against a claim being made on the PPF. In addition to the above funding level triggers, we expect superfunds to identify any other events that may trigger the commencement of the wind-up of the superfund or it being left to run on without the support of the corporate entity and/or capital buffer. For example, if there is someone who may (for example under the pension scheme’s trustee deed and rules or the superfund’s legal arrangements) decide whether the superfund, its pension scheme, or a section of its pension scheme, should be wound up.

For all triggering events, superfunds should provide full details of the actions they will take to implement the result of the trigger. This could include transferring the capital buffer to the trustees in line with the low-risk funding trigger specified above or commencing the wind-up of the pension scheme. These strategies should include an estimate of the costs involved and the time required to complete their implementation.

7.3.4 Value extraction

We plan to develop a specific mechanism based on a profit trigger, and will carry out further analysis in order to do this. We plan to engage with stakeholders on the appropriate mechanism and will update this guidance accordingly.

Until that point, surplus value in the scheme or capital buffer should not be used as capital to support new transfers into a superfund. All transfers into a superfund should be able to meet the capital adequacy test on a ‘standalone’ basis. We expect fresh capital to be provided at a level which, together with the transferring scheme assets and any transferring employer contribution, would satisfy our capital requirements if that scheme is considered in isolation.

7.3.5. Any fees, costs, or charges[2] should be justified by the nature of the services being provided

Until a specific mechanism is set out to extract profits, as above, superfunds may need to levy fees and charges on the pension scheme and/or capital buffer in exchange for the provision of services. It is critical that these fees and charges are appropriate, transparent and fair. They should not disrupt the principles underpinning our capital requirements or funding triggers. They should also be consistent with those capitalised in the pension scheme’s TPs.

Where fees, costs and charges are levied, superfunds should comply with our principles below. If the superfund is unsure whether a fee, cost or charge could be seen as profit extraction, the trustees should contact us to discuss.

We will not be setting prescriptive limits on the level of fees and charges applied to the pension scheme. However, we do expect superfunds to adhere to the following principles:

  • Fees and charges levied should be no higher than equivalent ‘market prices’

    We expect the fees, costs and charges to be benchmarked in line with market levels for pension schemes of similar scale and complexity to ensure they reflect the service supplied. In setting these, we expect superfunds to adhere to the spirit of our requirement regarding profit extraction. During assessment, and supervision, trustees should demonstrate to us that the aggregate level of fees, costs and charges that will be, or are being, levied on the pension scheme are at least in line with market levels of pension schemes of similar scale . We would also expect trustees to ensure they are getting value for the services they commission.

  • Any success or transaction fees should be disclosed to all parties prior to transfer.

    Our requirements for TPs and the capital buffer are net of all costs and charges so any such fees should not affect the security our framework aims to deliver. However, when trustees and employers are considering whether to enter or transfer to a superfund, they should be made aware of all fees and charges associated with the transfer.

  • Any arrangement or structuring of fees in relation to transferring scheme transfer premium facilities that fall within investment principle 6 (described below), would be in addition to the capital buffer requirement and cash funded.

    For example, a requirement for a payment of £50 million by the ceding scheme’s employer to enable the transfer could not be facilitated by a £55 million structured bond, which included the arrangement/structuring fee. Any such arrangement would also need to comply with investment principle 6.

  • In the event of either trigger being hit, any restrictive covenants regarding service providers to the superfund should fall away.

    The purpose of the trigger is to place trustees in control of a decision to run on or transfer members out. Therefore, they should not be inhibited by contracts that could impact a decision being made in the best interests of the pension scheme members.

We are mindful that our additional expectations of superfunds during this interim period may lead them to incur some fees and charges, which could be higher than for non-superfund DB schemes of equivalent size and complexity. We appreciate this is within the context of the superfund’s aim to provide a more efficient and effective management of scheme liabilities, and to achieve economies of scale.

As part of our assessment process, superfunds should submit full details of their policies to us in relation to fees, costs and charges. We expect this submission to include details of the governance processes around the appointment and payment of service providers and how fees will be set and allocated between the scheme and buffer. In addition, we expect the submission to include details of any benchmark analysis completed in line with market levels of fees and charges for pension schemes of similar scale and complexity.

We expect fees, costs and charges to be monitored on an ongoing basis and the superfund trustees to regularly demonstrate to us that they are getting value for money for the services they commission. Any material changes to their policies in relation to fees, costs and charges need to be reported to us. We expect to see in place legally binding agreements that give us comfort that superfunds will adhere to this approach.

7.4. Investment arrangements

During the interim period as different superfund models emerge, we are mindful that some models may not get market support, may not achieve critical scale, may fail or may decide to exit the market. In that event, we want the investments held by the pension scheme and the capital buffer to be appropriate (including realisable and transferable for full value) to enable 100% of members’ benefits to be protected to a high degree of certainty.

The capital buffer is a proxy for the employer covenant, and while not an asset of the pension scheme, it forms part of the longer-term security for members, which can be called upon when needed. Therefore, it is essential that the assets in the capital buffer are invested in a manner appropriate for the scheme, because the capital buffer may be called upon (and the buffer assets may need to transfer to the scheme) to provide support for the pension scheme.

We expect trustees to gain control of the investment strategy and/or the assets in the capital buffer (or the share of the capital buffer appropriate to their section) when the funding level falls below a funding trigger level. It is possible that trustees may gain control earlier than this in some superfunds.

Our investment principles help to ensure that all the assets held are invested appropriately for the liabilities, concentration risks are limited, the assets held are transferable and investments accepted as part of any transferring scheme transfer are consistent with investments that the trustees would ordinarily hold.

Our investment principles are not exhaustive. However, we are of the view they are the minimum that should be applied and are reasonable to apply during the interim period until a long-term regulatory framework is developed.

We would expect to see agreements in place where superfunds can demonstrate how they comply with our principles.

Trustees of superfunds have the same obligations as if they were a trustee of any DB pension scheme. In addition, we expect trustees of superfunds to apply the following principles 1 to 7. A superfund’s capital buffer is subject to all these principles:

The investments of the superfund’s capital buffer and pension scheme should comply with the seven principles set out below. The principles are:

  • Investment principle 1: Capital buffer assets invested as though the Occupational Pension Schemes (Investment) Regulations 2005 apply (investment regulations).
  • Investment principle 2: Scheme assets should be managed in line with asset scale.
  • Investment principle 3: Recognisable maximum allocations.
  • Investment principle 4: Limits on illiquid assets.
  • Investment principle 5: Use of in-house pooled funds.
  • Investment principle 6: Investment in transferring employer investments or asset-backed funding.
  • Investment principle 7: Transition plan for transferring assets.

Investment principle 1: Capital buffer assets invested as though the Occupational Pension Schemes (Investment) Regulations 2005 apply (investment regulations)

The assets in the capital buffer should be able to provide effective support to the pension scheme when it is needed and form an essential part of the security of the pension scheme. Therefore, they should be managed in a way that aligns with the needs of the pension scheme.

We acknowledge that the investment regulations do not directly align with the various ways that capital buffers may be structured within different superfund vehicles. However, we believe applying the high-level principles within the investment regulations will help to ensure that risks within the buffer investment arrangements are mitigated during this period. Where specific provisions do not fit specifically due to the structure of the capital buffer, we will expect superfunds to ‘comply or explain’.

Investment principle 2: Scheme assets should be managed in line with asset scale

We want to avoid a superfund investing (or committing to invest) too much and/or too quickly before achieving scale. If the scheme had to transfer to another superfund or wanted to run on (following failure of the superfund or a decision to withdraw from the market), this could have significant consequences for the level and suitability of investments entered into. It could also affect the level of member benefits that could be secured with another superfund or provided if the pension scheme ran on.

Investment principle 3: Recognisable maximum allocations

Unless supported by appropriate independent investment advice, the recognisable maximum allocations of any issuance or security will be limited as follows:

  • 5% limit of the total issuance of a security and 2.5% limit of an issuer’s total debt and equity issuance (including subsidiaries and associated companies, excluding government bonds rated AA or higher). This should be measured at an overall level across all mandates with look-through applied to underlying holdings.
  • 1% to a single security and 2% to a single issuer (excluding government bonds rated AA or higher). This should be measured for each section across all mandates with look-through applied to underlying holdings.

In addition, we expect superfunds to provide full disclosure of all investment service agreements, including portfolio guidelines and the risk controls (concentration limits, bandwidths, etc) within them as part of our assessment process, and as part of our ongoing supervision. We will also require the same information in relation to the capital buffer.

We acknowledge that concentration risks within some investments, such as certain risk transfer products (for example, buy-in policies) and other third-party pooled investments may be outside the direct control of the trustees. We will exclude buy-in policies from the requirements of this principle and expect trustees to either comply or explain in relation to third-party pooled investments they hold.

This principle will help to ensure that concentration risk is limited and appropriately managed.

Investment principle 4: Limits on illiquid assets

Recognisable illiquid assets held should fall within the fair value hierarchy, as set out in FRS102. The allocation within each category should be within the following ranges3 across both the scheme and capital buffer:

  • Level 1: 30% to 100%
    Level 1 is where the fair value of the asset is based on the quoted price in an active market for an identical asset.
  • Level 2: 0% to 50%
    Level 2 is where a quoted price is unavailable and where the price of a recent transaction for an identical asset is used to provide evidence for the fair value.
  • Level 3: 0% to 35%
    Level 3 is where, in the absence of an active market or recent transaction to an identical asset, a valuation technique based on estimating the price of an arms-length transaction is used.

This principle ensures that trustees have access to assets that are readily realisable in the event of a transfer to another provider if required. These assets should be sufficiently liquid so the transfer to another provider is not unduly impacted.

Investment Principle 5: Use of in-house pooled funds

Unless otherwise agreed, recognisable in-house pooled funds can only be used for quoted assets that can be freely traded in an active market and that can be transferred in specie, without penalty.

Where in-house pooled funds are being used, superfunds should seek agreement from us. As part of our ongoing supervision, they will be required to submit evidence that any in-house pooled funds are consistent with investments the trustees would otherwise ordinarily have chosen. The requirement for evidence will include independent advice as to the suitability of the fund, together with details of any exit restrictions or penalties.

Investment Principle 6: Investment in transferring employer investments or asset-backed funding

Any investment decisions in relation to investment either directly or indirectly in transferring employer investments or asset-backed funding vehicles should be consistent with investments the trustees would otherwise ordinarily have chosen.

This includes decisions made in relation to any assets transferred by the ceding employer or any ongoing payment streams from that employer to the superfund.

In addition, to demonstrate that the investments are consistent with investments the trustees would otherwise ordinarily have chosen, the trustees will be required to provide independent advice as to their suitability as part of ongoing supervision. This will also include the requirement to provide independent advice on the fair value of any such investments, which allows fully for the embedded credit risk.

Investment Principle 7: Transition plan for transferring assets

Assets transferring to the pension scheme or the capital buffer must be subject to a transition plan.

Where superfunds take on portfolios of assets from transferring schemes which do not immediately fit within either the investment principles or their own investment strategy, we will expect a clear transition plan for re-alignment of those assets. This plan should seek to do so as quickly as possible given the liquidity and dealing cycles of the assets concerned. Unless otherwise agreed with us, we expect the plan to demonstrate that the transition would be fully completed within 12 months of receipt of the assets.

Where a superfund intends to run an elevated risk for an extended period of time and is not supported by a credible transition plan, we expect that risk to be supported by additional capital.

7.4. Integrated risk management

We believe that development of a detailed and robust integrated risk management (IRM) framework is a key component in the effective management of the risks within a DB scheme. We expect superfunds that plan to gain and deliver economies of scale and improvements in governance, investment and risk management for transferring schemes, to develop robust IRM frameworks and monitoring dashboards. These should be at an individual scheme level and aggregate scheme level. They should address the full range of risks the pension scheme and wider superfund is exposed to (including consideration of the impacts of scale and the pace of change of scale) and how these may develop and evolve over time. We expect these risks may vary in comparison with ‘standard’ DB scheme risks. For example, given the pension scheme’s reliance on the success of the capital buffer, investing in the same opportunities as the capital buffer carries with it increased risk to the success of both scheme and buffer.

We expect an IRM framework to include the following:

  • A liquidity risk management plan: we would expect this to set out the superfund’s policies and processes in relation to liquidity risk and their proposals for managing and monitoring those risks. We would also expect this plan to examine liquidity needs in both benign circumstances and under market stress and expect it to allow fully for ‘mark-to-market/mark to model’ impacts on realisable investments.
  • A climate risk management plan: we want to ensure that the risks relating to climate change are adequately allowed for in the development of superfund investment strategies. We expect superfunds to develop a set of policies and processes in relation to the assessment of climate risk and to set out their proposals for managing and monitoring those risks. For the avoidance of doubt, this expectation is additional to any relevant legal obligation on a scheme in this area.

We expect superfunds to undertake a sufficiently wide range of stress tests and provide us with outputs from these tests to demonstrate their resilience. This should be appropriate and proportionate to their scale and resources. Therefore, it is likely that the robustness and range of the tests will increase as a superfund matures and reaches scale.

We expect schemes to have clear and robust monitoring processes in place. On request, we can provide a monitoring and reporting template so potential applicants have an understanding of our expectations during supervision. We would expect applicants to reference our expectations and how they would meet them in an application for assessment.

We would expect trustees’ monitoring to include the following:

  • The funding level of the pension scheme, how it is expected to develop, and how it has performed since inception on a range of bases appropriate to the superfund model. For example, where a superfund model is aiming to achieve buy-out in the medium term (for a section or the whole scheme), we would expect funding progress to be monitored on a buy-out basis for a section or the whole scheme, in addition to the TPs and S179 basis.
  • The development of the funding level compared to our intervention triggers.
  • The probability of the scheme (or each section of the scheme) being fully funded above our intervention triggers over different time periods.
  • The impact of an instantaneous shock or stress event, such as a 1 in 100 downside event on the funding level and the impact that might have on the future development of the funding level (for example, the time to reach buy-out) and the probability of our intervention triggers being hit.
  • The impact that shocks (ie changes in key assumptions) would have on key risks the superfund is exposed to (such as credit risk, equity risk, interest and inflation risks), and the movements in those risks.
  • The investment and liability risk the superfund is exposed to decomposed into their key component parts.
  • The key liability hedging metrics (interest rate, inflation rate and longevity), compared to their strategy hedging targets and on a range of bases appropriate to the superfund model.
  • The asset allocation for the pension scheme and capital buffer and how it compares with the strategic asset allocation set for the superfund. We would expect this to be tracked from inception.
  • A high-level assessment of the superfund’s progress against its business plan, its progress in attaining sufficient scale to be sustainable, and progress against any key capital provider milestones.
  • The level of expenses incurred on an ongoing and cumulative basis and how those levels of expenses compare to the levels of expense reserves funded when schemes were taken on.
  • The quality of scheme data taken on, the degree of uncertainty in that data and the extent of exposure of the superfund to any data quality true-up or adjustment premiums agreed with transferring scheme employers.
  • The exposure of the scheme to revisions such as variations in interpretations or changes in the law, for example, in relation to GMP equalisation.

Footnotes for this section

[2] Fees, costs and charges includes fees such as those paid for administration, advice, services to members, success payments, start-up cost recovery, transaction fees, and those relating to investment management.

[3] The limits on illiquid assets having been updated slightly in light of feedback from our targeted engagement and some additional advice from Mercer.

8. Appendix A: assumptions to be used for calculating minimum TPs

There are a number of ways of deriving assumptions for calculating minimum TPs. The assumptions to be used should be in line with the specification below unless alternative assumptions, which are not expected to materially impact on the level of TPs, are used. Where not specified, those assumptions subject to actuarial judgement should produce TPs no lower than those resulting from best estimate.

Discount rate

Gilt curve + 0.75% pa

The gilt curve should be the yield curve for fixed interest gilts as published by the Bank of England. Beyond the maturity of the longest material gilt issue the curve should be projected on the assumption of a constant forward rate.

RPI inflation

Inflation curve as published by the Bank of England extrapolated appropriately. In particular, for terms longer than published, the curve should be projected on the assumption of a constant forward rate.

CPI inflation

Based on RPI, adjusted to reflect the expected difference between RPI and CPI, having regard to both historical trends and the alignment of RPI with CPIH in 2030.

Inflation linked pension increases*

Based on the relevant measure of inflation adjusted to allow for caps and floors based on a recognised method and an appropriate inflation volatility assumption.

Mortality base tables

Based on current expectations of “best estimate” mortality using appropriate mortality tools and/or experience as available.

Where these approaches are not used, then the base table should be set using the CMI approach for S3 base tables using the 'light', 'average', 'heavy' tables in accordance with pension size. These can be applied at either an individual level or in aggregate across the scheme.

Mortality improvements

No less than calculated using:

  • an appropriate CMI projection table/model
  • long term rate of improvement no lower than 1.5% pa
  • unadjusted A, Sk and w core parameters*

*where the socio-economic factors indicate that higher rates of improvement are appropriate, the parameters should be adjusted


Members may be assumed to commute part of their retirement pension for a cash lump sum. The proportion commuted should be no higher than recent experience and the assumed commutation factor should be based on the current factor with an allowance for future improvements.

Other member options, for example, CETVs and PIEs

No allowance.

Proportions dependent/married

Where the scheme provides for survivor pensions the assumption should be no lower than recent experience. Where there is no reliable scheme specific evidence, you should adopt assumptions consistent with PPF guidance for s179 purposes.

Age difference

Females should be assumed to be three years younger than males. Where there is reliable scheme specific evidence counter to this, this assumption can be adjusted accordingly.

Expenses and PPF levies

We expect a prudent expense reserve that is sufficient to cover expected costs of running the scheme or, if higher, winding up the scheme. In running the scheme, it should be sufficient to meet all fees, costs and charges, including any future success or cost recovery payments and PPF levies. This reserve should be monitored and updated in line with experience.

*these assumptions are subject to actuarial judgement, they should be no lower than those resulting from best estimate.

9. Appendix B: modelling

We expect superfunds to demonstrate the approach they have taken to satisfy our requirements, including that the modelling they have undertaken is appropriate.

For the assessment, we will need to be comfortable that the investment and risk models superfunds intend to use are appropriate, robust and capable of accurately measuring and monitoring risks that the scheme is exposed to. As part of this assessment of the superfund, we will require full details for the following:

  • all of the models the superfund is using to test the adequacy of their capital buffer, including asset valuation models, and any models relating to elements such as options or derivatives
  • any component models that feed into the main models, for example, the Economic Scenario Generator (ESG) component for the ALM model 
  • all assumptions that feed into these models, including where they are sourced from, and how they are set, adjusted, modified and signed-off
  • any proprietary or ‘off-the shelf’ models a superfund proposes to use
  • the governance arrangements surrounding these models, including who is responsible for the models, the degree of independent scrutiny the models are given, and how changes are made, validated and authorised

We will require details of all the assumptions underlying these projections to be transparent and justified. The following (non-exhaustive list of) points are likely to be of key importance:

  • expected returns for various asset classes, attributable to the scheme and in the capital buffer
  • distributions of those returns around their expected levels
  • their assumed development over time and
  • their correlations/inter-dependencies

We will require the sensitivity of the minimum capital buffer required to meet our guidance to all material assumptions, for example including credit default rates and expected median or mean returns.

We expect the stochastic modelling for the scheme and buffer to include all the relevant and material risks that the scheme is exposed to. The asset side should include all market risks relating to the asset portfolio (such as real and nominal interest rate, currency, property, credit default and downgrade and equity risks). All assumptions should be net of fees and charges. We expect reinvestment risk to also be assessed. This modelling should align where necessary with the investment principles as outlined above. The liability side should include benefit inflation risk.

The capital buffer should include a longevity reserve at least equivalent to an increase in liabilities caused by changing the assumption for the long-term rate of improvement in the mortality assumptions to 2% per annum.

We also expect any risk mitigations in place – such as hedging in relation to interest and inflation rates or hedging of mortality risks - to be accounted for in the modelling.

When reviewing the modelling, we may wish to explore individual elements further depending on the methods that have been used and the specific circumstances of the superfund. This is to ensure that the superfund’s modelling output is consistent with the capital adequacy principles that we have set out above.

We also expect a brief statement of Modelling Principles, signed by trustee and the superfund to be prepared. This should be kept permanently up-to-date and lodged with TPR. We expect it to signpost more detailed underlying information relating to the model and assumptions.

Following our assessment of the investment and risk models, we will expect superfunds to inform us of:

  • any material changes (or any series of changes that may together be material) that they plan to make to the models they are using,
  • the reasons for those changes; and
  • the impact of those changes.

If superfunds propose to make such changes, we will need to undertake a further assessment of their investment and risk models to ensure continued compliance with the above principles.

10. Appendix C: ongoing supervision and superfund transactions

10.1. Ongoing supervision

We expect superfunds to continue to meet our expectations, as set out in this document, and to engage with us following assessment. Through this engagement, we will seek to understand fully the challenges and risks the superfund faces, adjusting our expectations in line with the superfund’s development. This regular engagement is also an opportunity to share good practice. In this guidance, we refer to this process as supervision.

As part of supervision, we expect those involved in the running of a superfund to act in an open, honest and transparent manner when we engage with them. Engagement with this process, including the supervision of transfers in and out of a superfund’s pension scheme, will be an indication of the conduct of those running the superfund.

To supervise a superfund effectively, we need to have a good understanding of how it is run and organised, its place in any wider corporate group, and the links it has with other persons. We will, therefore, ask for ongoing information about how the superfund is being run. This will include regular (ie monthly, quarterly and annual) reports regarding key aspects of our requirements.

Additionally, we will ask superfunds to report to us when key information provided changes or is updated, and notify us in a timely manner. During the assessment process, we will ask superfunds to identify the significant events that could disrupt or change the running of the superfund, and report to us if these events occur. We will also suggest these events in our ongoing discussions with superfunds. Where a superfund is unsure whether to report an event or change, they should contact us for clarification

Superfunds will be subject to an onboarding assessment when we are notified of an intended transfer into it. The focus of the further assessment is on:

  • any aspects of financial sustainability not considered during the main assessment
  • capital adequacy (ie assets against liabilities) (see note 1)
  • the changes or development of a superfund’s systems and processes which have taken place since the assessment
  • material changes to the superfund since the original assessment

We would expect superfunds to provide detailed investment and actuarial information on a regular basis following a transaction.

Note 1: We are only able to check that the capital adequacy expectations set out in our guidance (ie technical provisions, capital buffer and level of assets) are being met in practice as part of an assessment – for example, when a specific transfer is proposed.

10.2. Superfund transactions

A key aspect of our supervision of superfunds is the scrutiny of transfers, both in and out of the pension scheme.

As part of this process, we expect ceding employers to apply for clearance in relation to a transfer from their scheme to a superfund. We consider this transfer to be a new category of clearance Type A event. As part of a clearance application, we will expect to see evidence of a ceding scheme’s trustee’s due diligence. The clearance application process is managed separately to the ongoing supervision process. For example, the clearance Application Team will not interact directly with the superfund unless agreed by the ongoing supervision team.

To support this, we expect superfunds to provide prospective ceding employers and trustees with full and transparent details of their offering, their associated fees, their funding and investment objectives, and their methods for achieving their objectives.

It would be inappropriate for us to issue any clearance statements for entry to a superfund before we have assessed the superfund against the relevant criteria. We therefore encourage superfunds to engage with us as early as possible and co-operate with our information requests in respect of transfers. We may also want to see and understand the expectations they are setting for the ceding scheme and its members.

As part of our interaction with trustees and employers of ceding schemes, we may need to reveal details of our assessment of the superfund. This may be required to explain any regulatory decisions we make. For clarity, it is the responsibility of external parties to have an open and transparent dialogue with each other about progress and to ensure information is shared in a timely manner. Ceding trustees may require details of our assessment of superfunds as part of their own due diligence.

We do not expect a superfund to accept the transfer from a ceding scheme that can access buy-out or is on course to do so within the foreseeable future (for example, in the next five years). This is consistent with the ‘gateway’ proposals in the DWP’s consultation.

For more information, please read our guidance for ceding employers and trustees considering a superfund transfer:

Transfer your DB scheme to a superfund

Superfund guidance for prospective ceding trustees and employers