On Friday 26^th July, the Pensions Regulator (TPR) issued updated guidance for Defined Benefit (DB) superfunds and other alternative arrangements developing in the market.

Here Adolfo Aponte, Managing Director and Head of Risk Solutions and Judy Anunda, Director, Cardano Advisory comment on the publication.

TPR’s updated guidance represents a major step forward in the developing market for Superfunds and Capital Backed Arrangements (CBAs), which provide important new options for companies and trustees looking to provide better outcomes for their members in a cost-effective way.

TPR has reaffirmed its support for industry innovation that accelerates the pace at which the DB pension fund market consolidates. 

In its new guidance, TPR has:

1. taken action to address some of the aspects of the Superfund guidance that inhibited the development of Superfunds;
2. opened up new flexibilities for trustees facing difficult decisions when their sponsor becomes insolvent; and
3. provided some clarity on how the Superfund guidance applies to the developing market for Capital Backed Arrangements (CBAs).

However, there are aspects of the guidance that remain work-in-progress, and where further industry debate and discussion will be needed as we move towards a permanent legislative framework.

Distributing returns

Allowing a Superfund to distribute returns to its investors should improve pricing for pension funds, while also making the structure more appealing to a wider range of investors. Encouraging more providers into this burgeoning market should increase optionality and encourage positive competitive tension that will strengthen the overall proposition. 

This step will bring Superfunds more in line with insurers, many of whom regularly pay dividends to their shareholders, but we see the guardrails established by TPR in this guidance as the bare minimum requirement. Robust governance and controls, as well as a clear strategic vision will be key to ensuring the policy does not end up exposing the security of members’ benefits.

Managing insolvency risk

TPR has also seen merit in relaxing the capital requirement for capital backed providers looking to rescue pension funds from the Pension Protection Fund (PPF). TPR is effectively giving trustees more tools to manage employer insolvency risk. In practice, with the number of cases entering PPF assessment at record lows, our sense is this move could end up supporting the contingency plans that enable trustees to run-on their pension schemes.  

Building on two successful superfund transactions over recent months, TPR’s new guidance is further evidence that alternative risk transfer structures are growing up.

Capital Backed Arrangements

TPR has clarified how its Superfund guidance should be applied to CBAs, drawing much clearer lines between those approaches that it considers to be “investment products” and requiring more limited oversight, versus more complex arrangements where trustees are encouraged to engage with TPR early to understand the capital and other requirements that may apply. This added clarity should help unlock discussions between providers and schemes, as well as increase interest amongst trustees and sponsors, leading to more transactions in this space.

Still on the agenda

TPR’s updated guidance is an important step forward for the Superfund and CBA markets, but it is not the end of the story. Several key aspects of the Superfund regime – particularly how the discount rate for Superfunds’ technical provisions is set and reviewed – still need further consideration.

As we stand, insurers and Superfunds are required to play by different rules, in a way that can make it hard for trustees and companies to know which solution is optimal in their circumstances. As we move towards a permanent legislative framework, there needs to be more debate across the industry about where the rules need to be consistent and different between the Superfund and insurance markets.