Following the launch of the interim regime for superfunds in June 2020, The Regulator has now published new guidance for trustees and sponsoring employers of DB schemes considering transferring to a DB superfund.
The new guidance aims to help trustees and employers to understand and meet the Regulator’s expectations.
While superfunds can offer good outcomes, they may not be suitable for all schemes.
Superfunds
A superfund allows for the severance of all or part of an employer’s liability of a DB scheme by either:
The Regulator’s expectations
Before trustees and their sponsoring employers enter into a superfund, they must demonstrate why they believe it’s in the best interests of their members and how the transaction meets the gateway principles.
The gateway principles state that a transfer to a superfund should only be considered if:
The ceding scheme should apply for clearance and for the trustees to demonstrate they have done their due diligence.
Clearance
A transfer to a superfund will be considered a new category of clearance, a Type A event. Ceding employers are expected to apply for clearance, providing evidence of the gateway principles outlined above.
Where trustees can’t provide evidence that the principles have been met, a clearance statement will not usually be provided. When a transaction proceeds, it should normally take place within three months of the clearance statement being issued.
The role of the sponsoring employer
The sponsoring employer will usually provide any additional capital required to meet the superfund’s entry price and to facilitate the transfer. It will play a key role in providing and coordinating the information needed for a clearance as well as being the clearance applicant.
It will be expected to provide the trustees with the required professional advice and to ensure that they have everything they need to consider such a transaction. They will also be expected to take their own professional advice regarding the transfer.
The role of the trustees
Transferring to a superfund is a significant decision and, therefore, trustees must carry out their own due diligence to demonstrate that the transaction is in the members’ best interests. The depth of such due diligence will depend on the scheme’s size and the requirements for transfer.
Areas the trustees’ diligence would be expected to cover include other options available to improve the scheme’s position, whether the superfund is suitable for its members and consideration of the funding and investment objectives, the conflicts of interest policy and whether the transfer is in line with the gateway principles outlined above.
Trustees will need to consider whether there has been any material detriment in past corporate activity or any recent value extraction.
If this is the case, they should investigate what further or alternative steps it would be appropriate to take. Given the complexity of such transactions, trustees should obtain appropriate professional advice. They may even consider appointing an independent trustee to provide such expertise.
Scheme members
Given the change to the scheme, members may consider accessing their benefits early or transferring out of the scheme. Trustees should therefore communicate clearly with them openly and transparently throughout the transaction. When members still want to transfer, trustees should direct them appropriately to allow them to make their own informed decision. Members should be encouraged to take independent financial advice and be referred to the Pensions Advisory Service for impartial guidance.
Alternative options available
Trustees should consider whether there are other forms of support to improve member security in the longer term other than transferring to a superfund.
Any assessment should include costs, security and the suitability for scheme members. Other options may include entering a DB master trust, capital-backed arrangements or access to economies of scale and improved governance.
Capita comment
Superfunds can be a good option for some schemes, although they do present their own risks and, therefore, it’s important that trustees carry out their own in-depth due diligence. This new guidance makes clear what is expected of trustees and their sponsoring employers to ensure that the best option for scheme members is achieved.
If schemes are considering a DB superfund, notification should be sent to the Regulator as soon as possible to allow early engagement and for any issues to be discussed at the earliest opportunity. This new guidance shows that the Regulator is committed to superfunds and is supportive of such transactions; given this, it will be interesting to see how their popularity grows over the coming years.