The development of commercial superfunds took half a step forward today with the publication of TPR’s latest guidance on what a Superfund needs to do to commence business and what occupational schemes need to do by way of “clearance” to use a superfund rather than insurance buy-out in its “end-game”.
The saga of superfunds is an epic struggle between the vision of those wishing to use the occupational pension regime to manage out pension liabilities and those who consider insurance the only safe way forward.
Until recently, superfunds had been considered dead in the water. Edi Truell , after several abortive attempts to get the Pension Superfund approved using the interim regulations from TPR, made it clear that he would not be trying again -unless something changed. Clara, which had been approved, has made it clear that getting schemes cleared to do business with it, is proving a lot harder than expected. In two years of approval it has yet to do a deal.
But the Mansion House reforms included consultations that made creating alternatives to buy-out a priority. The speed at which revised guidance has followed the July 12th consultations suggests that there is an urgency to the DWP’s intent that has not been seen since its original consultation in 2018.
The question now is whether the superfunds see sufficient opportunity in the new regulations to persevere and whether there is sufficient appetite from occupational schemes to create a market.
The DWP and TPR should be pleased by a recent piece of online research by Aon.
Aon polled the 330 webinar participants, who included trustees and scheme sponsors, on the potential long-term strategy alternatives for their DB scheme. The majority, 61 per cent, indicated that they were willing to weigh multiple options.
Around 82 per cent of respondents who were asked what options they would weigh stated they would consider a potential insurance buyout of their plan. But 51 per cent also said that they were open to the idea of continuing with the pension plan over the long term with a low return ‘self-sufficiency’ goal.
The most popular of the Chancellor’s suggested measures to encourage long-term investment in UK productive assets was to run-on and target pension excess.
Around 30 per cent of respondents preferred continuing the scheme with an investment strategy targeted at maximising value for scheme stakeholders, including the sponsor, while 26 per cent stated they would consider using a commercial consolidator or superfund.
Moreover, 17 per cent of respondents said that they would think about using a public consolidator, which might be the Pension Protection Fund.
Clearly there is plenty to play for.
We will have to wait and see whether Truell and others are going to reapply for approval, we will have to wait and see. There are considerable concessions made for entrants in terms of the capital buffer that needs to back transactions which look attractive but after five years of deliberation , the Pensions Regulator still can’t make up its mind about what is an acceptable profit margin and when profit can be taken.
Using the language of dentistry is unfortunate , but getting TPR to make its mind up looks like pulling a tooth
7.3.4 Value extraction
We plan to develop a specific mechanism based on a profit trigger, and will carry out further analysis in order to do this. We plan to engage with stakeholders on the appropriate mechanism and will update this guidance accordingly.
Frankly , this is not good enough. There should be no more consulting, the Pensions Regulator needs to work this out for themselves/
Until that point, surplus value in the scheme or capital buffer should not be used as capital to support new transfers into a superfund. All transfers into a superfund should be able to meet the capital adequacy test on a ‘standalone’ basis. We expect fresh capital to be provided at a level which, together with the transferring scheme assets and any transferring employer contribution, would satisfy our capital requirements if that scheme is considered in isolation.
Is any commercial operator, take the substantial risk involved with standing behind a scheme, without clarity on how they can get a return?
7.3.5. Any fees, costs, or charges should be justified by the nature of the services being provided
Until a specific mechanism is set out to extract profits, as above, superfunds may need to levy fees and charges on the pension scheme and/or capital buffer in exchange for the provision of services. It is critical that these fees and charges are appropriate, transparent and fair. They should not disrupt the principles underpinning our capital requirements or funding triggers. They should also be consistent with those capitalised in the pension scheme’s TPs.
I think it highly unlikely that any superfund will be prepared to play to the Pension Regulator’s undetermined timetable. Dashboard providers know the risks of doing that.
Where fees, costs and charges are levied, superfunds should comply with our principles below. If the superfund is unsure whether a fee, cost or charge could be seen as profit extraction, the trustees should contact us to discuss.
We will not be setting prescriptive limits on the level of fees and charges applied to the pension scheme. However, we do expect superfunds to adhere to the following principles:
Those who stand behind superfunds , have a reasonable expectation of a return on capital. Why should they put capital up and be asked to operate on a “not for profit” basis, pending TPR’s assessment of what is “appropriate , transparent and fair”.
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Fees and charges levied should be no higher than equivalent ‘market prices’ We expect the fees, costs and charges to be benchmarked in line with market levels for pension schemes of similar scale and complexity to ensure they reflect the service supplied. In setting these, we expect superfunds to adhere to the spirit of our requirement regarding profit extraction. During assessment, and supervision, trustees should demonstrate to us that the aggregate level of fees, costs and charges that will be, or are being, levied on the pension scheme are at least in line with market levels of pension schemes of similar scale . We would also expect trustees to ensure they are getting value for the services they commission.
This hints at skullduggery. This is unbecoming of the Pensions Regulator. Are trustees really going to collude with Superfunds to allow them to overcharge as a means of “fee extraction”?
There is a defensiveness about this guidance, that points to the past and not to the future, TPR’s CEO has called for a change of mindset, let’s hope we will see evidence of that in the months to come as for the Mansion House Reforms to happen, they need a more positive approach.
Good to see TPR moving on superfunds, but with all the remaining caveats, I can’t see any competition to Clara arriving this year.
The Treasury and DWP need to put pressure on TPR to clarify why they object to organisations taking on DB responsibilities being able to take profits. Do they not realise Insurance Buyouts typically come at a 30% premium to run on, and lets say have a 15 to 20% margin. That future expected profit can be counted in their capital adequacy margins in the first year. That does not seem to make a level playing field for superfunds.
TPR have also published a self-commending blog which blames the failure of the 2020 guidance to attract a single deal to a superfund on the markets
“When we published our guidance, we committed to review the issue of profit extraction within three years. But many things have changed in the last few years. The industry has had to deal with the longer-term market impacts of COVID-19 and material changes in yields and inflation. As a result, the superfund market is yet to really get going.”
The reality is that there is strong demand for superfunds, (see blog) but no deals! TPR must recognize that by extending the consultation on “profit extraction”, they are simply prolonging the problem. They need to get off the fence and provide firm guidance, 5 years of consultation is long enough
Or a massive step?
May I extend the debate by asking whether anyone else has currently (or previously) thought of a UK Sovereign Super Pension Fund solution provided by and underwritten by HMG? From my perspective, some key considerations would include
• Member benefit security. A HMG guarantee feels better than most if not all existing sponsor covenants. With insurers not covering 1 in 200 risk events there is some comparable legal comfort on the existing trustee and company legal discharge on transfer/wind up.
• HMG is currently consulting on productive long term pension fund investment in UK plc; this would be an opportunity to put that into practice. The investment success of the PPF and the pooled LGPS pooled funds might add some supporting lobby fodder.
• Investment via a Sovereign Super Pension Fund would facilitate massive pooling of investment risk, minimising cash flow issues for individual schemes as well as cost savings. The investment consultants and managers would still potentially have the same £bns to look after but not the same number of schemes. (A PPF impact x 10?)
• In the 1960s, 1970s such a suggestion might have caught a “nationalisation” tag in some newspapers. Today I suggest a Sovereign Wealth Fund tag would be more palatable and easier to float.
• An entry requirement of 100% funded on “gilts+0.5%” feels appropriate for initial discussion purposes. Most schemes already at that level will probably have insurance buy-out in their plans and leaving them to do that should placate the insurers a bit! Any benefit augmentations to reduce the funding toward that level should simply be banned.
• Continuing benefit accrual would preclude entry, but such a safety net might assist in keeping some DB schemes open to new members and continued accrual. The impact for paid-up underfunded schemes or poorer covenant sponsors will be difficult to judge but any target lower than S75 is undoubtedly likely to be welcomed.
• Unlike standardised PPF reduced benefit compensation, original individual Scheme Rules would as a default have to apply, suggesting continued business for the vested interest of existing administrators, accountants, lawyers and actuaries. Some PPF scale fees might however be negotiated longer term! Some insurance and PPF like data audit, benefit specification and discretion tidying might be a sensible additional entry requirement.
• Such a future HMG vested interest might also accelerate attention to case law on sex, age, GMP and S37 matters and legislation to resolve it!
After member security, Investment is the big issue and only HMG can facilitate provision of an appropriate framework or umbrella. There will still be a huge amount of work for the existing pensions industry participants.
A Treasury, DWP, TPR & Select Committee perspective would be interesting, as would yours be.
In your dreams.
Historically Governments have stepped in when a system is broken/needs support. For a UK Government to step in to provide a guarantee to a HMG sponsoped Superfund just so it can access capital therein, that the market doesn’t believe it can raise through taxes or gilt issue would be playing with fire
Thanks John for that perception. I would hope that such a Sovereign Super Pension Fund’s continuing actuarial reporting of (total inherited individual scheme) liabilities and (combined) assets would leave a very different perspective. The PPF has the unguaranteed compensation cushion and initially it involved levy payer underwriting, but that fund is very distant from any such perception. Indeed with not having the gilt bias of insurance buy-out assets, the comparable insurance target assets or the continued and maturing TPR gilt based self-sufficiency framework, the reality may be the opposite.
Such future actuarial valuation would also be an immediate and ongoing test of investment performance and benefit guarantee cost. Positive investment performance needn’t involve consideration of “profit extraction” because the funds would simply be left in or extended to productive investment in UK plc. The actuarial and accounting timescales would however need to be more “private sector” than the current “public sector” debacle. Future tax payers are guaranteeing much larger index linked occupational pension liabilities elsewhere.