Willis Towers Watson comments on TPR’s green light for defined benefit superfunds

London, 18 June 2020 – Rash Bhabra, Head of Retirement for Willis Towers Watson said: “Superfunds will be a welcome addition to the range of options available to trustees and corporate sponsors for their de-risking journeys.

“Trustees and the Regulator will be determined that superfunds should be a way to improve member security, not to allow sponsoring employers to walk away from their pension obligations on the cheap. Ultimately, trustees need to judge whether members’ benefits will be more secure if they retain recourse to an employer whose prospects are unclear or if they take some cash which might not otherwise be available and rely on the superfund’s capital instead. There will be cases where, on the balance of probabilities, it looks better to twist than to stick. Clearly, this will not include schemes who can see a quick and realistic path to buyout.

“The types of schemes where a superfund could be a viable option include those that are reasonably well-funded, but struggling with a weaker sponsor whose future is uncertain. Superfunds might also appeal where a parent company with no legal obligation to the scheme is prepared to put money in to get the scheme off the group’s books, but not enough to buy the scheme out with an insurer.

“Following COVID-19, some schemes might now have fewer options available to manage risks and meet benefit promises, and so a transfer to a superfund could create materially improved outcomes for their members. The impact of the contracting economy on sponsors could now make the market for superfunds much bigger than it would have been without the pandemic.

“However, whilst superfunds will have a meaningful place as a pension de-risking strategy, trustees and sponsors should be careful about rushing to utilise this option in isolation as there are many alternatives for schemes working with a sponsor with a weakening covenant.

“Should superfunds now demonstrate they can quickly build out from their blueprints into fully functioning and large consolidation vehicles, today’s announcement may herald one of the most significant changes to the defined benefit landscape in recent years.”

Jargon-buster: What is a superfund?

• A defined benefit pension scheme set up specifically to receive a bulk transfer of the assets and liabilities of other schemes to transfer them from the stewardship of the existing trustees and the sponsor
• Typically, a cash injection is also paid by the sponsor and the superfund’s investors to a separate buffer account. This would be called upon in the event of the superfund’s funding needing to be topped-up in future
• It will usually cost less to transfer a scheme to a superfund than to buyout the scheme with an insurer. The level of security is correspondingly weaker
• A superfund is a “for profit” entity. Investors will expect to make a profit in return for putting up buffer capital
• Transferring to a superfund removes the employer covenant - clearance would therefore normally be sought from The Pensions Regulator (TPR)
• Superfunds are also referred to as commercial consolidators. The first two that have launched are Clara Pensions (which seeks to provide a bridge to buyout) and The Pension SuperFund (which seeks to run off benefits itself, with some scope for benefit improvements)