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Consolidation – the future for defined benefit schemes?

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With more DB schemes approaching maturity, and their sponsoring employers seeking to secure members’ benefits or to transfer risk, the DWP has published its latest consultation, setting out proposals for a new legislative framework for authorising and regulating defined benefit (DB) “superfund” consolidation vehicles

Consolidation already happens across the pensions market to varying degrees, with options including sharing and outsourcing administrative services, pooling assets and liabilities through common vehicles such as a DB master trust, and securing benefits through insurance buy-ins and buy-outs. However, the Government considers that “encouraging a well regulated superfund sector may offer a more effective way of managing liabilities for some schemes”.

What is a superfund?

The DWP’s initial view is that the main characteristics of a superfund are as follows:
  • a superfund is, or contains, an occupational pension scheme set up for the purposes of effecting consolidation of DB pension schemes’ liabilities
  • a transferring scheme’s link to the sponsoring employer(s) is severed on transfer to the superfund
  • the “covenant” is a capital buffer provided through external investment that sits within the superfund structure, and
  • there is a mechanism to enable returns to be payable to persons other than members or service providers.

Proposed legislative framework

Although the current legislative framework does not prevent the establishment and/or marketing of superfunds, in the absence of a suitable regulatory framework, the Government is concerned that members of such arrangements may not be appropriately protected. It therefore proposes making DB superfunds subject to an authorisation and supervision regime similar to the one now in force for defined contribution master trusts.


A superfund will be required to seek authorisation from the Pensions Regulator. The Regulator will have to be satisfied that the superfund:
  • can be effectively supervised
  • is run by fit and proper persons
  • has effective administration, governance and investment arrangements
  • is financially sustainable, and
  • has contingency plans in place to protect members.

“Gateway” proposals

A key issue for the DWP is ensuring that superfund consolidation is not seen as, and cannot be used as, an alternative to buying out benefits with an insurer. It is therefore considering strengthening the current scheme transfer process by introducing a regulatory “gateway” to ensure that the decision to enter a superfund is in members’ best interests. The gateway would be based on the following principles:
  • excluding schemes that are assessed by the trustees as having the ability to buy-out at the point of transfer
  • excluding schemes assessed by the trustees as being able to afford buy-out in the “foreseeable future” (defined as a period of up to five years), and
  • for any other scheme looking to transfer, a move to a superfund would need to be based on evidence that it enhances the likelihood of members receiving full benefits.

In addition, when considering a move to a superfund, trustees would be required to take the following factors into account:
  • the scheme’s current funding position on a solvency basis
  • any deficit reduction contributions
  • professional covenant advice
  • actuarial advice regarding the future funding of the scheme, and
  • the funding position and the long-term objective of the superfund.

Next steps

It seems clear that the government considers that superfunds, if well regulated, could improve the security of members' benefits. However, many of the DWP’s proposals will require primary legislation which will be introduced “when Parliamentary time allows”. The fallout from the Lloyds case regarding the need to equalise for the effect of GMPs could also impact on timings. In the meantime, DWP expects any superfund considering entering the market to engage with TPR and the PPF before doing so.

Nigel Cayless, associate director, Sackers.