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”.
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.