Pensions: defined benefit superfunds

What is a superfund?

Defined benefit (DB) schemes pay a promised pension which is based on factors such as salary and length of service. In a DB scheme the sponsor is responsible for ensuring that the scheme has enough assets to pay the benefits it has promised. If a sponsor wants to end its liability for the scheme, it can seek to transfer a DB scheme to a superfund with the agreement of the scheme trustees and clearance from the Pensions Regulator. A superfund is a consolidator body which replaces sponsoring employers with additional assets held in reserve (a capital buffer). The capital buffer may be provided by investors seeking profit and a payment from the sponsoring employer ending its liability. The Minister for Pensions and Financial Inclusion said that to “enter a superfund, sponsoring employers are required to pay a significant, upfront sum to improve the funding level of their scheme, in exchange for discharging their pensions liabilities.”

Traditionally, a sponsor that wanted to end its liability for a pension scheme purchased an insurance product at a premium. A sponsor’s liability may also end if it becomes insolvent.

Superfunds can be defined as the highest level of consolidation between different schemes. Lower levels of consolidation between schemes include sharing services and pooling assets. The Government is generally in favour of pension schemes consolidating. Smaller pension schemes have been seen in general as more costly and less efficient to run than larger schemes (PDF).

Developing proposals and regulations for superfunds

Under current legislation, superfunds are treated the same as other trust-based DB schemes. In December 2018, the Government put forward detailed proposals for the regulation of superfunds in a consultation.

A Pension Schemes Bill (now the Pension Schemes Act 2021) was introduced in the House of Lords in January 2020 without provisions for superfunds. During the passage of the Bill, the Minister for Pensions and Financial Inclusion Guy Opperman MP said that the “Government must bring forward legislation in respect of superfunds in the fullness of time” having earlier explained that the complexity of the required legislation will take time and require “at least a 50-clause Bill”. At that point two superfunds, Clara and the Pensions Superfund, had been established, though neither was yet active.

Interim regulatory regime

In the absence of legislation and with two potential superfunds established the Pensions Regulator undertook a “targeted consultation” looking at capital adequacy, value extraction and investments. It said that it would take an interim approach to superfunds until there is a legislative regime.

In June 2020 the Pensions Regulator published guidance for DB superfunds, following the response to its consultation. Superfunds are expected to complete an assessment process with the Pensions Regulator before they can accept the transfer of a scheme. Although there was no specific legislative authorisation framework for superfunds, the Pensions Regulator explained that it could use its existing powers if funding, personnel or governance of a superfund was not fit for purpose. The first superfund, Clara-Pensions, completed its assessment process in November 2021.

Initially superfunds will not be able to make a profit, unless member benefits are bought out in full with an insurer. If legislation is still not in place, the Pensions Regulator will review its decision within three years (by June 2023).

Comment and debate

The key debates about superfunds have focussed on:

• The appropriate body to regulate superfunds.
• Whether superfunds provide an alternative to buy-out with an insurer. A buy-out involves an insurer taking full responsibility for guaranteeing the benefits of a pension scheme for all its members.
• The regulation of superfunds before a legislative framework is in place.