UK Seeks Input on DB Superfund Consolidation Rules

Regulator will scrutinize all superfunds to identify potential risks.

Defined benefit superfunds seeking to enter the UK market will have to communicate to The Pensions Regulator (TPR) their plans before opening for business, according to new guidance from the regulator. The UK government is also seeking consultation on a new legislative framework for authorizing and regulating defined benefit superfund consolidation schemes.

In a move intended to help protect pension participants, TPR has outlined its expectations for defined benefit superfunds that intend to operate before an authorization regime is put in place, and while the authorization framework planned by government is under consultation.

Superfunds are defined benefit pension plans established to accept bulk transfers of assets and liabilities from other defined benefit plans. Instead of an ongoing employer covenant, member security comes from a capital buffer provided by the former sponsor and investors who expect to profit from the arrangement.

The guidance states that TPR will scrutinize all defined benefit superfunds that enter the market to make sure any risks are identified, assessed, and mitigated.

“We believe DB superfunds are potentially a force for good and can provide a secure and safe place for pension saving and help drive up standards,” David Fairs, executive director of regulatory policy, analysis, and advice at TPR, said in a release. “However, as these schemes come to market, we need to give savers confidence now that these schemes are well-governed, run by fit and proper people, and are backed by adequate capital.”

Fairs added that by coming to TPR now, superfunds can show the regulator how they plan to meet the regulatory and governmental standards, and prevent possible regulatory action in the future.

The UK’s Department for Work and Pensions (DWP) consultation on consolidation of defined benefit pension plans proposes a range of areas in which TPR will have to be satisfied. TPR said its guidance reflects the consultation proposals.

The consultation seeks views on a new legislative framework for authorizing and regulating defined benefit superfund consolidation plans. It gives an indication of the government’s policy intentions and likely focus of the legislation.

According to the DWP, the advantages of a superfund are that it can protect savers through a capital buffer, which will provide greater security by reducing the risks associated with future employer insolvencies.

A superfund can also provide an alternative way for employers in certain circumstances to separate themselves from legacy pension arrangements by moving closed pension plans into a superfund, allowing them to focus on the day-to-day running of their business. The DWP also said superfunds improve the likelihood of members’ benefits being paid in full.