Pension Superfunds: Bright Future or Flash in the Pan?
The Pension Superfund is an interesting development for employers and employees in the United Kingdom and is beginning to become relevant in all of Europe. Insurers have recently been given the green light to offer the superfund and several insurers are already putting this in place for their customers. These Pensions represent a new and highly regulated ‘vehicle’ designed to consolidate UK occupational Defined Benefit (DB) pension funds.
The superfund is achieved using a novel new method that accepts bulk transfers of all pension assets and liabilities from multiple employers’ DB funds into an existing HMRC (the UK tax authorities) registered and Pension Protection Fund eligible arrangement. In other words, an existing employer’s DB scheme is moved, as a bulk transfer, directly into the ‘Superfund’ which is managed by new trustees and is topped up, as necessary by a final sponsor (Employer) contribution to make up any fund deficit. Superfunds are also unique in that they involve the replacement of a DB scheme’s sponsoring employer with the capital-backed “Special Purpose Vehicle” (SPV).
From the employer’s perspective the cost of the overall contribution may rise. However, any Commercial Businesses who inject a required “Capital Buffer” amount can gear themselves up to generate a profit margin from the Superfund, so herein lies an initial, tangible benefit in making such a move.
For insurers, it is also important to note that digital solutions have moved from desirable to industry standard. Insurance software can manage the administration such a fund requires with ease, creating significant efficiency and automation, where a roomful of actuaries and administrators were once required. Such efficiencies are also reflected in a reduction of charges, and this is enabling far greater margins to be generated and maintained over the medium to long term.
Nevertheless, The Pensions Regulator (TPR) is taking a firm supervisory stance on the set up and operation of Superfunds, in consideration of administrative systems, processes and member data amongst others.
The TPR gave pensions Superfunds the go ahead in June 2020.
What are the wider upsides for employers in transferring their DB assets in bulk to a superfund they share with other employers’ funds? On the one hand, having a new and regulated option for employers offers the certainty that the financial obligation represented by their DB scheme can be met in a regulated and safe way. Furthermore, , once the upfront employer capital injection has taken place, the DB in its new form immediately increases its funding level to 115%. This highlights the concept of “Upside Sharing” and works in a strongly regulated environment by adopting well defined rules that benefit all the fund’s Members.
Moving to a Pension Superfund offers several potential opportunities as well. At the more obvious end of the scale there is the potential for benefit improvements flowing from economies of scale. On a more subtle note, however, membership enables employers to adopt a lower risk investment strategy due to high initial funding levels, alongside the greater certainty of more stable costs that this option drives – a highly desirable commodity for any potential business buyer. A further upside can also be delivered to overseas ‘Parent’ companies looking to offload liabilities.
Of course no option is without its drawbacks and these funds are only relevant to certain types of employers where they align to their circumstances and business strategies. One consideration is that future transfers from employers into the superfund can dilute funding for earlier members. Schemes may also be challenging or out of reach for some employers because the ‘capital injection’ required is too high for their balance sheets. And despite technology creating an environment of greater efficiency, there is enormous complexity in managing multiple ‘employee groups’ across ever-changing regulation and the inevitable unexpected that can always be expected.
So what of the future, is it bright for the superfund? A recent survey by Willis Towers Watson of 280 key industry players, insurers, scheme trustees and pension directors found that as many as 62% believed that superfund schemes were a positive development for scheme members and, despite the short time these options have been available, 1 in 10 DB schemes have already discussed moving to one. It also seems like this option could present an opportunity for schemes with a “burning platform”, such as a weak or uncertain covenant, who cannot afford to buyout a scheme.
The report concluded that, “We would expect that as superfunds become a regular feature of the landscape, more and more schemes would embrace such an offer from their employer. This suggests superfunds could have considerable scope for growth”. It seems the future may indeed be looking bright for the Pension Superfund.