You would be forgiven for thinking that 2020 was the year of ‘Size Matters’. The summer started with the Industry raving about the opportunities being created by Defined Benefit (DB) superfunds. But whilst they offer an alternative to fully-fledged buyout, they seem likely to only be accessible to larger schemes. [see our previous insight What next for DB? Consolidators and Superfunds].
TPR updated guidance has provided clarity for larger schemes. But smaller DB schemes can also feel optimistic that the market available to them has certainly not stood still.
Options for the big fellas
When the Pensions Regulator issued initial interim guidance for superfunds, we predicted that larger schemes would be prioritised and that solutions for smaller schemes would need to be made available.
Since then, we have been waiting with bated breath to see what would happen next, and how quickly the first transactions would happen. Last month further guidance was issued for trustees and sponsors considering transactions with a DB superfund.
Employers will have to apply for clearance from tPR ahead of any risk transfer to a superfund. TPR will expect ceding trustees and their sponsoring employers to be able to demonstrate that the transaction is in the best interest of their members. To do so, it is expected that three ‘gateway principles’ are met by the transaction, namely:
- A transfer to a superfund should only be considered if the scheme cannot afford to buyout now,
- A transfer to a superfund should only be considered if the scheme has no realistic prospect of buyout in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer, and
- A transfer to the chosen superfund must improve the likelihood of members receiving full benefits
This additional guidance opens up the opportunity for partial transfers to a superfund. This could potentially be used for a distinct group of members where the scheme is not able to buy out all members’ benefits with an insurer or transfer all members to a superfund.
The additional guidance is generally welcomed by the industry. Our view remains that costs will likely remain too high for all but the largest of schemes, at least until some scale is achieved by the superfunds.
This remains an interim regulatory regime which will be replaced, once the legislation is ready, with a full authorisation regime
However, trustees and sponsors must remember that transferring risk to a superfund is only one option to consider when looking at how to save costs. Other options are available and may well be more accessible to smaller schemes.
Superfunds versus consolidators
Since the summer’s flurry of excitement surrounding superfunds, DB master trust vehicles have come to the fore. These offer DB schemes the opportunity to consolidate services and take advantage of the economies of scale available. Mercer and Punter Southall being two of the providers launching products recently.
Mercer’s DB Master Trust is a solution providing a range of services including investment and fiduciary management, scheme management, administration, actuarial and independent professional trusteeship. In this model the employer ultimately remains responsible for funding the scheme but leverages the buying power of Mercer. Mercer has evolved its solution from the Federated Pension Plan, and hence already has a solid foundation of significant assets and participating employers upon which to further develop.
Punter Southall also recently announced its own solution for smaller DB schemes looking to reduce their costs whilst enhancing benefit security and outcomes for their members, Stoneport.
Stoneport is a consolidation vehicle targeting DB schemes with less than 1000 members. Initially set up as a DB master trust, the aim is for Stoneport to become a multi-employer scheme once it reaches 100 schemes – expected to be by the end of 2022. Punter Southall expects savings to grow from 20% (at the initial stage) to 80% once it becomes a multi-employer scheme. The end goal being for the scheme to move to full buyout by 2045 – a great solution for sponsors looking to pay off their pension liabilities over a longer period.
From small things, big things grow
Both of these solutions will be attractive to sponsors of schemes not able to afford buyout or risk transfer to a superfund. In a post-COVID world, the opportunity to gain efficiencies, to outsource governance and to build capacity where internal expertise might be lacking cannot be ignored. We are sure this will be an area to watch as smaller schemes look to benefit from market innovations in the same way as larger schemes are able to.
Go Pensions has extensive expertise across the pension provider market. If you are interested in discussing cost saving or consolidation options for your pension scheme, whether DB or DC, regardless of size, please call Tina or Susan on 020 8213 5890.