Innovation has been seen in many fields in recent years. Many see defined benefit superfunds as a good option to challenge the status quo in the pensions world. Put simply, superfunds are structures which allow employers to sever their liability towards their defined benefit pension schemes by replacing themselves with a separate entity with a capital buffer. It is hoped this will result in better outcomes for members of medium-sized schemes.
Insurers have raised concerns, as superfunds may take away their role in the buy-out process, but the prospect of increased competition has led to further innovation in the insurance industry. There has also been increased use of defined benefit master trusts. This diversification of options is certainly a good thing for pensions members.
In the absence of specific legislation on superfunds (government has understandably had other priorities over the last few years), the UK Pensions Regulator (tPR) has introduced guidance with the intention that this will allow transactions to start. The guidance covers the following:
- People: those running superfunds should be fit and proper, act with honesty and integrity, and have sufficient knowledge, skills and experience.
- Governance: trustees should have sufficient oversight of superfunds, there should be open and transparent communication, and systems should be in place to identify conflicts of interest.
- Systems and processes: this partly relates to the superfund’s IT systems being set up and maintained, but also to processes in relation to member communications and complaints.
- Financial sustainability and capital adequacy: tPR expects superfunds to be adequately financed to support the pension schemes and to ensure that they have sufficient capital for “there to be a very high probability of members’ benefits being paid in full.”
This final section has caused concerns for the Bank of England. It has been widely reported that the Governor of the Bank of England, Andrew Bailey, has written to the Secretary of State for Work and Pensions to say that superfunds could threaten the UK’s financial stability. The main thrust of his concern is that superfunds will not have to comply with the same capital adequacy requirements as other players in the market (including insurers).
It is hoped that the government will act soon and engage with the regulators and other relevant stakeholders to implement a comprehensive legislative framework for superfunds. Only then will there be sufficient certainty for providers to start offering the innovative solutions that are missing from the pensions sector.