A superfund is a consolidation vehicle that involves removing the employer covenant and replacing it with the security of third party capital. Unlike insurers who are regulated by the Prudential Regulation Authority (PRA), superfunds are overseen by The Pensions Regulator (TPR) and covered by the Pension Protection Fund (PPF). In addition, superfunds currently don’t have to comply with Solvency II capital rules, the practical effect of which could mean that settlement is in reach of more companies where a full insurance buyout is not affordable.
In December 2018 the government launched a consultation on the regulation of superfunds. Two early runners are already in talks with schemes and we are expecting them to complete their first transactions in Q2 2019.
Here are 6 considerations for pension schemes considering a transfer to a superfund:
- Superfund models vary widely. Think carefully about which is right for you
Only two providers, The Pension SuperFund and Clara Pensions, have so far been active in the market with several other contenders preparing possible launches. Yet despite the narrow field, we see big differences in the approaches they are taking in terms of business model and structure. It’s therefore important that trustees carefully consider the specific route they take.
- There’s no need to wait…
The government’s consultation on DB scheme consolidation (which has superfunds at its heart) isn’t expected to wrap up until later this year. But that doesn’t mean trustees and companies need to wait. With TPR having already issued guidance for superfunds, trustees and sponsors, transactions are able and starting to happen prior to regulations coming into force. Those transactions will need to obtain TPR clearance.
- … however, entry rules remain hazy
The government’s consultation proposes a ‘gateway’ which judges whether schemes can take the superfund route, being mindful that if insurance buyout is affordable then that should be the route taken.
The screening questions used in the current iteration of the gateway appear straightforward. However, in reality, they beg further questions. For example
a. “Are you fully-buyout funded today?” (This question is open to interpretation - to what extent should covenant be taken into account for example?)
b. “Will you be in five years?” (Again open to interpretation – what level of sponsor contributions should be assumed? Also does a scheme have the necessary level of certainty over its buyout position in future years to answer this?)
c. “Can you prove a superfund transaction will increase the chance of members receiving full benefits?” (Does this take the full range of scenarios into account? For example, what if member outcomes are enhanced without increasing the likelihood of members receiving full benefits?)
- The interaction with insurance pricing is key – but not straightforward
There is a big difference between a ‘standard’ insurance quote and the kind of price you might achieve with an insurer who’s pulling out all the stops. This can make a big difference to the trustees’ analysis of the Gateway test and whether they should go down the superfund path at all. Getting the best insurance price isn’t straightforward however. If a scheme isn’t fully committed to insuring it can make things difficult in practice as insurers can often detect this and are less likely to provide a competitive price.
- Schemes will need a new breed of ‘superfund advisor’
TPR has stressed that trustees need detailed covenant, actuarial and investment analysis to support their decision whether to go into a superfund. However, just as important is how these different strands are brought together. Over time, we expect specialist superfund advisers to combine guidance around these three strands into a single service.
- It’s not a fast process
Trustees applying to a superfund will have to clear the same hurdles and carry out the same checks as on an insurance buyout, for example checking that member benefits match their legal entitlement.
However, compared to an insurance buyout there is much more to consider. Gateway tests will require detailed analysis – as well as subjective interpretation – and no one knows how long TPR will take to clear and authorise superfund transactions.
Nor do we know how TPR might rule on individual transactions. We’d estimate the entire process – from preparing to receive quotes to finalising a transaction – will take eight to 12 months (versus around six months for a traditional buyout).
If you have a client that would be interested in this solution or you would like to find out more about superfunds please email Tom Seecharan, Director of Pensions and Head of the Pensions Insurance team at KPMG in the UK.
Webinar: On Tuesday 21 May 2019 at 11:00 to 12:00, we are joining The Pension SuperFund and Clara Pensions on the Professional Pensions webinar to look at this new form of defined benefit consolidation. Click here to register.
We have also published the second edition of KPMG’s look at superfunds: New solutions for DB pension plans, which has further information on superfunds, the providers in the market and whether you should be looking at a superfund.