The State Pension is expected to increase substantially next April for the second consecutive year, prompting debate about the affordability of the ‘triple lock’.
On 6 November 2023, the trustees of Sears Retail Pension Scheme agreed for it to become the first scheme in the UK to transfer to a ‘pension superfund’.
This Insight explains what pension superfunds are and how they work.
What is a pension superfund?
A pension superfund is a new type of pension fund that takes on private defined benefit pension schemes from their original sponsors (often employers). This would end the original sponsor’s responsibility for the pension scheme. By consolidating schemes, pension superfunds aim to gain ‘economies of scale’ over individual schemes.
Defined benefit pension schemes pay a promised pension based on factors such as salary and length of service (not based on employee contributions). A sponsor, which is often the employer, guarantees that the promised pension benefits will be paid. As these defined benefit schemes pay a pension for life, they may need to continue to provide pensions long after the original sponsor has ceased to exist.
If a pension scheme no longer has enough assets to guarantee the members’ pensions, a pension superfund can take on responsibility for the guarantee instead of the sponsoring employer. The superfund guarantees the pensions through its own assets held in reserve (a capital buffer).
The capital buffer might be made up of investments from investors seeking profit and payments from sponsoring employers ending their liability for their schemes.
What are the alternatives for ending liability for a pension scheme?
Traditionally, a sponsor that wanted to end its responsibility for guaranteeing the pensions provided by a scheme would have to purchase an insurance product. For example, an insurer would take full or partial responsibility for guaranteeing the benefits of a pension scheme.
A sponsor’s responsibility for guaranteeing a scheme’s pensions might also end if it becomes insolvent. In these cases, the scheme would be assessed by the statutory Pension Protection Fund (PPF). Members of the scheme might then receive pension payments from the PPF, which are typically smaller than they would have been under the original scheme. If the scheme had sufficient assets, then members might be able to receive larger payments than usually offered by the PPF, for example, through an insurer.
What is the Sears Retail Pension Scheme?
Sears Retail Pension Scheme is a defined benefit pension scheme for 9,600 former employees of Sears, a former UK retail group. The scheme has not had a sponsoring employer since Sears ceased operations.
The Times reported that the Sears Retail Pension Scheme is £67 million short of the funds required to transfer the scheme to an insurer.
The scheme will instead transfer to the Clara-Pensions superfund, which will provide an additional £30 million funding. Clara says that in its model each scheme is transferred with a well funded capital buffer. It then works towards transferring the pension to an insurer in seven to ten years on average.
It explains: “Only once member benefits have been fully secured or provided for do any excess assets in the section and buffer provide a return of and return on capital.”
How are superfunds regulated?
Under current legislation, superfunds are not treated differently from other trust-based defined benefit pension schemes. They are regulated by the statutory Pensions Regulator using its existing powers.
In December 2018, the Government put forward detailed proposals for the regulation of superfunds in a consultation. In his July 2023 Mansion House speech, the Chancellor said the Government would set out “plans on introducing a permanent superfund regulatory regime”.
Proposals for a future legislative framework were published in a consultation response shortly afterwards.
Pensions Regulator guidance
In the absence of legislation, the Pensions Regulator published guidance for defined benefit superfunds in June 2020, which it updated in August 2023.
Superfunds are expected to complete an assessment with the Pensions Regulator before they can accept the transfer of a scheme. Although there is no specific legislative authorisation framework for superfunds or for how they draw profits, the Pensions Regulator can use its existing powers if funding, personnel or governance of a superfund is not fit for purpose.
What happens if a superfund fails?
During the interim period before legislation the Pensions Regulator aims “to ensure a high degree of certainty that members’ benefits will be paid” .
Superfunds are expected to have detailed and costed plans for all likely scenarios, including for winding up the fund to prevent failure.
Superfunds should hold enough capital to give a 99% probability of a scheme’s members’ pensions being paid in full; however, this is not a legal requirement. The superfund must also have two legally enforceable triggers which result in action being taken if the scheme’s funding falls below a certain level. These are:
- A low-risk funding trigger: if the scheme is funded below a minimum level, funds in the capital buffer will be added to the pension scheme.
- Wind-up trigger: set at 105% of the amount required to secure the benefits paid by the PPF with an insurer. This aims to prevent the PPF from having to meet the costs of a shortfall should the superfund fail.
More detail on pension superfunds is available in the Commons Library briefing Pensions: defined benefit superfunds.Do not type over or delete this non-printing text
About the author: James Mirza-Davies is a researcher in the House of Commons Library specialising in pensions.
Why is the Government proposing to increase pension benefits three years after introducing reforms to reduce costs?
In 2016/17 the State Pension accounted for around £93 billion of Government spending – around 43% of total spending on social security and tax credits in Great Britain. Total social security expenditure directed at pensioners, of which the State Pension made up the vast majority (78%), was around £119 billion. This made up over half