Appendix E: Capital-backed arrangements
Typically, capital-backed arrangements entail a commercial contract where third-party capital supports the delivery of a range of agreed outcomes for the scheme at the end of an agreed period. The capital supports investment risk being taken and generates returns for the investor.
The extent to which we expect such arrangements to comply with our superfund guidance, depends on their design, whether the scheme retains the link with the existing employer, and the circumstances in which they are being implemented. For further information on what aspects of our superfund guidance apply to groups 2 and 3 (below), we would encourage trustees to engage with us once there is a firm commitment to consider an arrangement.
Group 1 – Provides capital to support investment performance
The employer remains in place and its obligations in respect of the scheme are unaltered. We view these as investment products. We view these as investment products.
Group 2 – Substitutes for solvent employer covenant
The original employer is substituted with a SPV employer while it is still a solvent, ongoing entity. The scheme is separated at the outset of the arrangement from its existing covenant support, which is replaced by a capital buffer. The transaction could be a Type A event under our clearance guidance.
Group 3 – Enables scheme to run on following insolvency
A SPV employer is introduced to enable the scheme to run on after an insolvency event has occurred, supported by a capital buffer.
Position of the SPV employer under a capital-backed arrangement
Typically, the SPV employer will:
- have no connection (present or historic) to the scheme’s members, in any real sense
- be connected in some way with the providers of capital, with whom the scheme is in a commercial relationship involving conflicting financial interests
Capital Backed Pensions; Business as usual
I get a lot of people asking when the capital backed pensions I am involved with , will get approval. The answer is that they are automatically approved as DB pensions so long as they meet the guidelines laid down for them by the Pension Regulator.
Pension SuperHaven is an example of a capital backed pension.
We are used to pensions being backed by employers , we must move on from this and recognise that employers are becoming more reluctant to sponsor future pension accrual and the capital markets are stepping forward to meet a need.
Employers have always been reluctant to sponsor pension accrual. They have only ever done so where it has been in their interests to do so; i.e. to attract workers; to retain workers; and to let workers go. People romanticise about a golden age of occupational pensions, but it’s important to remember that these only ever covered up to half of employees. And some schemes were rubbish. The employers of the other half didn’t provide pensions because it wasn’t in their interests to do so. That’s why we had to have the State Earnings Related Pension Scheme.
It’s interesting that the capital markets want to get involved in sponsoring schemes to run on- suggests that there is a lot of margin in buy- out. Consolidation will follow
As it turned out a guarantee by an employer was barely a guarantee at all. Sometimes the guarantee expired before the employer. But employers can’t really be expected to guarantee pensions to ex employees decades after they left employment.
So its right there is a margin in buy out, pensioners and deferred pensioners are gaining certainty over their current and future pensions.