In this article we outline how we can help you consider the recently extended range of options for securing member benefits; whether that is because you have a proposal on the table (for instance, from your corporate sponsor) or as a trustee you are keen that the scheme develops its plan B, in case the journey plan becomes derailed in the future.
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Glossary
Superfunds (also known as commercial consolidators) are pension funds set up by a commercial entity to consolidate defined benefit (DB) pension schemes. They are designed to meet member benefits in full, with a high probability but at a cost lower than an insurance buyout. However, they will not offer the same degree of security as an insurance buyout. Following the transfer of a pension scheme to a superfund, the original sponsoring employer has no further liability. The employer covenant is, in effect, replaced by a capital buffer that is part of the superfund.
Transferring to a superfund removes the employer covenant - “type-A” clearance would therefore be sought from The Pensions Regulator, and as part of that, it will wish to see trustee due diligence on the proposed transfer.
Although superfunds can be suitable for some schemes, especially those where the covenant is not certain, one size rarely fits all in the pensions industry and there are alternatives. Our at-a-glance summary below sets out how the superfund solution may work with other key options available to schemes:
| Option | ||||
|---|---|---|---|---|
| 1. Self-managed run-off | 2. Third-party capital solution | 3. Superfund (or other scheme transfer) | 4. Insurance buyout | |
| Suitable for schemes with funding level, allowing for available employer contribution (% of buyout) | Any | 85-90% | 85-90% Buyout unaffordable in foreseeable future |
100% |
| Does the current scheme and trustee board remain in place? | Yes | Yes | No – replaced by superfund | No – replaced by insurer |
| Does the employer covenant remain in place? | Yes | Yes | No – but may take equity | No |
| Do the trustees cede significant / all control over the management of the scheme assets | No | Yes | Yes | Yes |
| Is buffer capital part of the solution? | No – unless there is a contingent asset | Yes | Yes | Yes – by far the best |
| Is it tried and tested? | Yes | No | No | Yes |
| Are members guaranteed their full benefits? | No – PPF safety net | No – PPF safety net | No – PPF safety net | Yes – default risk is remote |
| Advisory costs for implementation | Low | High | High | Low |
| Examples | Most schemes currently operate like this | Solutions such as Legal & General’s Insured Self Sufficiency | Clara-Pensions | Several UK regulated insurers offer this solution |
At present, the vast majority of UK schemes are focusing on either option 1 above (self-managed run-off) or option 4 (journey to buyout) and these are likely to remain appropriate for most schemes. However, we believe that for a number of schemes other approaches might result in better outcomes for members and sponsor employers. Option 2 above (third-party capital solution) is an example that can be appropriate even where the covenant is strong whereas option 3 (superfund, or other scheme transfer) would usually apply where the covenant was weak(ening) or had failed (for example, a transfer to enable coming out of PPF assessment).
WTW has extensive experience in helping trustees identify their strategy in order to deliver clarity of journey for all stakeholders
WTW has extensive experience in helping trustees identify their strategy in order to deliver clarity of journey for all stakeholders.
The interplays between outcomes for different individuals can be complex. As an adviser these are issues we have advised upon time and time again, whether as actuary to pension schemes or as expert actuary when policyholders are transferred from one insurer to another.
The Pensions Regulator has provided details of its gateway test that deals would need to meet in order to receive clearance approval.
Contingency planning has been encouraged by the Regulator for a number of years. We believe that pension schemes should have a considered plan B as well as a clear understanding of what circumstances would trigger its implementation. For example, should self-managed run-off become unrealistic or start to look highly risky due to a worsening of covenant, which plan B should be in place to improve outcomes for members? That plan B might very well be one of the options we have set out above, or a blend of them.
Importantly, due to the dynamics experienced when a covenant starts weakening (which can happen rapidly) or fails, some of these options may become closed off to a scheme resulting in worse member outcomes. Developing what the plan B looks like means that trustees, often in collaboration with the employer, can mitigate potential obstacles that would become real barriers should the covenant worsen or fail in the future.
Improving member outcomes – Creative solutions
WTW’s advisory service helps trustee boards compare the superfund option with the more traditional alternatives, allowing you to navigate to the optimal destination for your scheme. Our six steps provide a robust process for considering a superfund proposal, as explained in this article: Thinking of moving into a superfund? The six steps trustees should take first. We utilise this framework – in a proportionate way – when developing a suitable plan B for your scheme.
We will make it easy for you to find the right solution, working with you end-to-end, using our easy-to-understand, jargon-free consulting approach. The right strategy may not be a superfund – we will independently consider your different options
We will make it easy for you to find the right solution, working with you end-to-end, using our easy-to-understand, jargon-free consulting approach. The right strategy may not be a superfund – we will independently consider your different options.
If you would like to learn more about superfunds, please contact your WTW consultant or one of the contacts below.
