This guidance will help trustees understand the approach we expect them to take when considering transferring members to a superfund.
The Department for Work and Pensions (DWP) is currently consulting on an authorisation framework to safeguard the benefits of members being transferred to superfunds. An authorisation regime will require superfunds to be authorised by us in order to operate. You can read more about the DWP consultation.
Superfunds are defined benefit (DB) pension schemes set up to accept bulk transfers of assets and liabilities from other DB schemes. Transfers to superfunds will usually involve an injection of capital by the employer (as well as the superfund’s investors) into a separate vehicle. This is available to meet the scheme liabilities after the employer ceases to have responsibility for the scheme. This transfer will have implications for the scheme covenant and security of members’ benefits due to the exchange of the employer covenant for increased funding with a finite capital underpin.
What you can expect from TPR
When you have decided in principle to transfer to a superfund, we expect you to notify us of your intention at the earliest available opportunity – eg at least three months before the planned transfer. Your notification should outline your rationale and evidence that transferring to a superfund will enhance member security.
We expect employers to apply for clearance before the transfer takes place. You can read more about clearance here. If granted, a clearance statement can provide assurance that, based on the information provided, we would not consider it reasonable to use our anti-avoidance powers in relation to the transfer. If an application is made, we may seek clarification from trustees and/or employer(s) through discussions, or ask for further information, before deciding whether to issue a clearance statement.
We will need sufficient information from you to support your rationale that the transfer into the superfund is in the best interests of your scheme members. As set out in DWP’s consultation it is unlikely to be in the best interests of members to transfer to a superfund where buy-out is a realistic prospect either now or in the foreseeable future (eg within the next three to five years).
As part of the clearance process, we will assess whether any detriment to the scheme has been adequately mitigated and ensure the scheme could not achieve a better outcome through other means. Trustees should consider all possible sources of value for their scheme.
What you should do
You need to make sure your decision to enter a superfund is in the best interests of scheme members. As part of the decision to transfer to a superfund, you will need to consider a wide range of factors. You should be prepared to provide us with your view on these factors. The DWP’s consultation proposes the following factors should be taken into consideration when considering a transfer to a superfund:
- The scheme’s current funding position on a solvency basis.
- Any deficit-reduction contributions.
- Professional covenant advice, with a clear conclusion on the employer’s ability to support the scheme for the foreseeable future.
- Actuarial advice regarding the future funding of the scheme.
- The funding position and the long-term objective of the superfund.
You will also need to obtain legal advice. This should include all of the usual considerations, such as advice on conflicts, including adviser conflicts of interest. It should also look at whether you have the power to make the transfer and, if you do, whether it would be appropriate for you to do so. This advice should also set out issues where you should take appropriate covenant, actuarial and investment advice.
We want to understand why you consider a transfer to a particular superfund the best option in the interests of beneficiaries (compared with maintaining the link with the employer, transferring to any other consolidator, or an insurance buy-out). As part of this process, we are likely to seek to understand your rationale and assumptions as to why there is no reasonable probability of achieving buy-out within the foreseeable future (for example within the next three to five years), including any reviews or stress-testing carried out on employer trading forecasts. We do not expect a transfer to go ahead if you already have the ability to buy-out or are on course to do so within the foreseeable future (for example, in the next three to five years). For smaller schemes, buy-out pricing may not be available. This is likely to be an acceptable rationale for there being no reasonable probability of buy-out.
Given the planned change in the circumstances of your scheme, members may be encouraged to request a cash equivalent transfer value. You need to ensure you are protecting your members from scams, and carry out the appropriate due diligence on any transfer request in the lead up to transferring to a superfund. You can read more about protecting members from scams.
Independent covenant advice
You should be continually monitoring and assessing the strength of the employer covenant of your pension scheme as part of your integrated approach to managing scheme risks. Given the significant impact of this transaction on the nature of the covenant offered to the scheme, we expect an independent covenant assessment to be an essential component of your considerations.
We expect the covenant advice to set out clearly the conclusion of the analysis and the matters considered, such as:
- the detriment caused to the scheme by removing the employer covenant and the extent to which this is mitigated as part of the transfer into the consolidator (ie by the employer’s top-up payment or other means)
- the employer’s ability to pay additional contributions and an assessment of the contributions that the trustee could otherwise reasonably be expected to obtain
- the estimated return to the scheme upon a hypothetical insolvency of the employer
- analysis of the support provided to the scheme before and after the transaction, and the impact on member security by severing the link to the current employer(s)
- whether there are other sources the trustee or TPR could pursue, which could achieve a better outcome for the scheme (such as immediate buy-out with an insurer)
Where you do not take professional covenant advice, we expect you to explain why you did not consider it appropriate in your scheme’s particular circumstances. It is only in exceptional circumstances we would consider not obtaining expert covenant advice to be acceptable.
Actuarial and investment advice: modelling member outcomes
You need to satisfy yourself that members’ benefits will be better protected in the superfund than remaining in the current scheme with the sponsoring employer. The actuarial advice you consider should include how the projected outcomes for scheme members compare if:
a) the scheme transfers to the superfund
b) the scheme remains with the employer
This advice should identify material risks the scheme will be exposed to, and the implications of these for members’ benefits under (a) and (b).
Your scheme actuary and/or investment adviser can provide further advice as to the most appropriate modelling methods, depending on the circumstances of the scheme and the objectives of the superfund. However, we expect this comparison to be informed by stochastic modelling of the progression of the funding of the scheme, supplemented by stress/scenario testing.
For (a), we expect projections to be provided by the superfund. These projections should take account of any initial contribution the employer will make to the scheme, cash flows to and from the capital buffer provided by the superfund (and the circumstances in which these occur,) and the development of the scheme’s investment strategy within the superfund.
For (b), you should consider the current funding and investment strategy and how you expect this to change over time as the scheme matures. In doing so, you need to consider the impact if it does not progress as expected, for example due to adverse (or more favourable than expected) investment experience. This involves judging how the employer would respond to an up-to-date covenant assessment. We expect any advice to include analyses of the differences in funding and investment strategies under both (a) and (b), and the different risks associated with them.
You need to be satisfied that the projections are based on appropriate assumptions about economic, demographic and scheme-related matters. Such assumptions should be consistent between (a) and (b) or, where they are not, any differences justified. Relevant assumptions are likely to include:
- key assumptions underlying the funding basis, how these have been determined and their link to the assets underlying the investment strategy
- expected returns for various asset classes, distributions of those returns around their expected levels, their development over time and their correlations/inter-dependencies
- member longevity
- uptake of member options (for example, transfer values, cash commutation, early retirement)
- future levies and expenses, recognising that there may be reasons to expect these to differ between (a) and (b)
We expect you to understand the scheme’s buy-out funding level and its likely progression in the short-term. If the scheme is already sufficiently well-funded and expected to be able to buy-out with an insurer, or to do so within a short period (within three to five years), we do not expect it to be appropriate to transfer to a superfund.