Commenting on TPRs new guidance for trustees and employers considering a DB superfund Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says:

“This revised guidance for trustees and employers clearly shows that TPR is committed to superfunds and is supportive of transactions happening ahead of an authorisation regime, and it will be interesting to see the list of their approved superfunds when this is published shortly.

“One key issue for the viability of transactions for smaller schemes is that the frictional costs of getting the right advice to support a transaction do not outweigh the other benefits. It’s therefore helpful that TPR confirms, in this guidance, that trustees can take some comfort from TPR’s own assessment of the superfund. It is also good to see it say that superfunds should provide ceding trustees with a summary of TPR’s assessment. A key judgement for ceding trustees is then the level of their own advice and due diligence that they carry out on top of this, which the guidance suggests, should be proportionate.

“A key principle for a transaction is that buy-out is not realistic in the foreseeable future. It is interesting to see that this timescale has been shorted to an upper limit of 5 years, but with an acknowledgement that it may be appropriate to consider shorter timescales in situations where covenant support is uncertain or fragile. This is presumably in response to Covid-19 impacting on employer covenants, and could now bring more schemes in scope of superfund transactions than had previously been envisaged.

“The clearance application for superfund transactions outlined in the guidance is very wide-ranging and this could risk making the clearance application more onerous than it might have otherwise been. It not only covers the more obvious points around how it improves member security, but also additional ones such as demonstrating why it is better than other forms of consolidation and support from the employer that might be possible, and considering if historic corporate activity had led to detriment to the pension scheme.

“It is good to see the guidance open the door to partial transfers, where for example a scheme insures its pensioners and transfers its deferreds to a superfund. Having an ability to split schemes in this way is likely to be useful. The way the capital requirements for superfunds have been defined means their pricing will be more favourable for deferreds, and may even be more expensive than insurance for pensioners.

“The guidance confirms that PPF+ cases should only consider a superfund if the superfund can provide 100% of benefits. This leaves a relatively small pool of schemes that might be eligible for superfunds after an employer insolvency event, as the scheme needs to be pretty close to fully funded on a buy-out basis to cover 100% of benefits in a superfund. There are some recognised issues with paying less than 100% of benefits in a bulk transfer, but if these could be overcome, it would open up superfunds to a broader range of more poorly funded schemes suffering employer insolvency events.”