Clear expectations for the release of capital from defined benefit (DB) superfunds form part of updated guidance released today by The Pensions Regulator (TPR).
TPR listened closely to the industry regarding capital release: the position in the updated guidance supports innovation, while retaining protection for scheme members.
The DB superfunds guidance now states capital can be released up to twice a year and when meeting a specific trigger and safeguards.
TPR has also listened to industry when considering how superfunds and capital backed arrangements (CBA) could play a role in the case of schemes whose employers have become insolvent. Here trustees may decide to enter into a CBA or superfund on a reduced capital adequacy basis where the alternative is for the scheme to buy out on less than full benefits.
Nina Blackett, Interim Executive Director of Strategy, Policy and Analysis, said:
“We expect superfunds and capital backed arrangements to increase as the DB market consolidates. We strongly support innovation in the interests of savers, and in updating the guidance we have worked closely with industry.
“The introduction of capital release will make it more attractive for providers to enter the market because it will enable surplus above a healthy funding level to be taken ahead of buyout. The inclusion of superfunds in the new Pension Schemes Bill should provide confidence to potential market participants.”
Notes for editors
Key changes
The updated guidance includes three main changes.
Capital Release
The previous version of the guidance only allowed capital to be released when benefits were bought out. The new version allows capital release when the total assets (in the pension scheme and capital buffer) exceed minimum capital adequacy expectations as set out in our guidance.
The capital release level is set to encourage a thriving and competitive superfund market while still maintaining a 99% probability of meeting members’ benefits, which is in line with DWP’s tolerance limits.
Additional safeguards have also been introduced to ensure a superfund does not pick favourable dates when markets are high to release capital and that there is a formal governance process around capital release.
Standalone Principle
The previous version of the guidance stated that upon a transfer of a new scheme to the superfund, fresh capital was to be provided at a level which, together with value obtained through the transaction, would satisfy capital requirements if that pension scheme was considered in isolation. The new version dispenses with the standalone test as long as the superfund in total is funded above the level at which capital might be released.
Superfunds or CBAs on reduced capital adequacy
The standard capital adequacy requirements may now be relaxed where a pension scheme’s sponsoring employer becomes insolvent and the scheme is unable to afford the buyout of full benefits, or to enter a superfund or capital backed arrangement on full capital adequacy terms. In such circumstances, trustees should be confident that the transaction is in members’ best interests and that, even on the lower capital adequacy basis, the level of benefits members might receive would represent a material improvement from buying out with an insurer on PPF+ benefits levels.
Our statutory objectives
TPR is the regulator of workplace trust-based pension schemes in the UK. Our statutory objectives are to:
- protect members’ benefits
- reduce the risk of calls on the Pension Protection Fund
- promote, and to improve understanding of, the good administration of work-based pension schemes
- maximise employer compliance with automatic enrolment duties
- minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only)
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