Superfund guidance for prospective ceding trustees and employers

Guidance for trustees and sponsoring employers considering transacting with a defined benefit (DB) superfund vehicle and other similar arrangements.

It has been updated to provide further detail on capital release, residual risks, the practical application of some investment principles, capital-backed arrangements and considerations for schemes with an insolvent employer in Pension Protection Fund (PPF) assessment.

30 June 2021

Minor amends to reflect the new MoneyHelper brand and website being provided by the Money and Pensions Service.

10 August 2023

Updated following guidance review: updates reflect changes to the Gateway principles and minor clarificatory changes.

26 July 2024

Updated further following industry engagement around issues including capital release, the standalone principle, and reduced capital adequacy.

Published: 26 July 2024

Purpose of this guidance

The market for superfunds, DB consolidation vehicles and other business arrangements enabling risk transfer for DB schemes is developing rapidly. This guidance is for trustees and sponsoring employers considering transacting with a DB superfund vehicle and other similar arrangements.

This guidance sets out our approach to regulating transfers to superfunds, as well as the approach we expect trustees and employers to take when considering whether to transact. As the market evolves, we will publish further guidance. We would encourage trustees and employers considering transacting to engage with us at an early stage, particularly in view of the complex issues arising from, and rapid development of, this market.

Background

The Department for Work and Pensions (DWP) is developing a legislative authorisation and supervision framework to safeguard the benefits of members moving into superfunds. It is likely that superfunds will need authorisation from us to operate once any legislative framework is in place. Further information can be found in the DWP’s 2023 response to its 2018 consultation.

In the meantime, we have introduced an interim regulatory regime for assessing and supervising superfunds. Further information can be found in our guidance for those running or setting up a superfund. Before a superfund launches, we expect the superfund to demonstrate that it:

• is capable of being supervised by its trustees
• is run by fit and proper persons with effective governance arrangements in place
• is financially sustainable and has adequate contingency plans in place to manage funding level triggers, as well as to ensure an orderly exit from the market
• has sufficient administrative systems and processes in place to ensure it is run effectively

Before trustees and their sponsoring employers enter into any transaction with a superfund, we expect them to demonstrate to us why they believe the transaction is in the best interest of members, and how the transaction meets the ‘gateway principles’. These principles are as follows.

1. A transfer to a superfund should only be considered if the scheme cannot access buy out now.
2. A transfer to a superfund should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer.
3. A transfer to the chosen superfund must improve the likelihood of members receiving full benefits.

We expect ceding employers to apply for clearance in relation to a transfer from their scheme to a superfund, and for trustees to demonstrate they have done their due diligence in respect of the transfer.

The gateway principles will be a key area we consider in a clearance application. For transactions where a clearance application is not appropriate, we will still expect notification of the transaction, and we will expect to engage with the ceding scheme and superfund. The gateway principles will also form a key part of our engagement in such cases.

What are superfunds and who are we assessing?

A superfund is a vehicle that, upon entry or at some point in the future, allows for the severance or substantial alteration of an employer’s liability to a DB scheme, or the DB section of a hybrid scheme, and where one of the following conditions applies.

• The scheme’s employer is replaced by a special purpose vehicle employer. This is, to all intents and purposes, a shell employer and is usually put in place to preserve the scheme’s Pension Protection Fund (PPF) eligibility, or
• The liability of the ceding employer to fund the scheme’s liabilities is replaced by an employer backed with a capital injection to a capital buffer (generally created by investor capital and contributions from the original employers).

The replacement employer, backed by a capital buffer, will usually support a consolidator scheme. Some of the important features of a consolidator scheme are as follows:

• a bulk transfer of a ceding scheme’s liabilities to a consolidator scheme, which is prepared to accept the liabilities of a number of schemes from unconnected ceding employers
• it will have its own governance and administration functions (these may be in-house or outsourced)
• there will usually be one trustee board

Other business arrangements

Some business arrangements – usually referred to as capital-backed arrangements – provide capital backing, but do not plan to consolidate schemes. There may be no change to the pension scheme in terms of trustees or the level of the control they have over governance and other management and administration aspects.

Appendix A provides further detail on scenarios where we would expect our guidance to apply for superfunds and other capital backed arrangements, including:

• PPF schemes in assessment
• entering into other arrangements where there is no immediate severance
• post-insolvency situations involving a capital-backed arrangement
• partial transfers to a superfund

We expect all trustees and employers considering entering into the arrangements outlined above to speak to us at an early stage.

Before transacting, we can discuss the specific circumstances of the prospective ceding scheme. See DB superfunds list and assessment for a list of superfunds we have assessed, together with information about our assessment process.

Transferring to a superfund

Clearance statements

We consider a transfer to a superfund to be a new category of clearance Type A event. We therefore expect ceding employers to apply for clearance in relation to a transfer from their scheme to a superfund¹.

As part of the clearance process, we assess whether any potential detriment to the scheme caused by the transfer has been adequately mitigated. In the case of a transfer to a superfund, the detriment is the removal of the ceding sponsoring employer’s covenant and the mitigation is the transfer of the scheme, along with any top-up payment or other mitigation.

Providing clearly documented consideration of the gateway principles will form a significant part of the ceding scheme’s trustees’ evidence, demonstrating that the detriment has been adequately mitigated, and therefore key to our assessment of a clearance application. We expect trustees to conduct this assessment, supported by the sponsoring employer. This will require trustees and employers to work closely, and collaborate to achieve the best outcome for members. Trustees will therefore be included in the clearance warning notice and determination notice as a ‘directly affected party’.

To provide a clearance statement for the transaction, we expect trustees to confirm to us that these principles have been met, and to provide the rationale for this view.

The transfer of liabilities to the superfund should take place as soon as possible (allowing time for the clearance process and to complete practicalities such as communicating with affected members) after the date when the gateway principles were met). In any event, the time between the date when the gateway principles were demonstrated to be met and the transfer taking place should not exceed nine months. Throughout that intervening period, we would expect the ceding scheme trustees to continue to consider whether they remain comfortable with the transaction.

Where a transaction proceeds, it should normally take place within three months of us issuing a clearance statement.

Where trustees cannot demonstrate the principles have been met, we will generally be unable to provide a clearance statement for the transaction. Where trustees believe one or more of the gateway principles do not apply to their situation, they should speak to us at the earliest possible opportunity.

The superfund will be expected to demonstrate that, once the transaction has taken place, it will continue to meet our expectations regarding capital adequacy. This will be a key consideration in our assessment of whether any detriment has been adequately mitigated. This means the superfund will also be included in the clearance warning notice and determination notice as a ‘directly affected party’.

It would be inappropriate for us to issue any clearance statements before we have assessed the superfund against the expectations set out in our guidance.

A clearance application may not be appropriate in cases where a scheme is in PPF assessment. See Appendix A for more information on this. 

The role of sponsoring employers in a superfund transaction

Prospective ceding employers will in many cases be providing any additional capital necessary to meet the superfund’s entry price and facilitate the transfer. This capital may also be provided by an entity in the employer’s wider group, or an external party.

Prospective ceding employers also have a key role in providing and coordinating the information needed for a clearance application, as well as being the ‘applicant’ for clearance.

Ultimately, ceding trustees will need to take the decision to transfer, or to agree to the transfer of their members out of their pension scheme. In this scenario, we expect any sponsoring employer to ensure their pension scheme’s trustees have all they need – including the necessary time, resources and information – to consider a transfer. The information could include:

• access to senior management and key post-holders
• financial forecasts and relevant management accounts for the sponsoring employer (and wider group if appropriate)
• details of current capital structure, detailing terms of lending and any key future refinancing dates
• relevant business strategy plans for the sponsoring employer and wider group

In general, we expect employers to pay² for the professional advice the trustees need to inform their consideration of any proposed transfer, including reports evaluating the sponsoring employer’s market position. Employers should also take their own professional advice regarding the transaction.

Footnotes for this section

• 1. A clearance statement gives assurance that, based on the information provided in the application, we would not consider it reasonable to use our anti-avoidance powers to issue a contribution notice or financial support direction against the applicants in relation to the transfer.
• 2. Where no material employer exists, we acknowledge that costs may need to be met by other sources, including, in some circumstances, scheme assets. Further information regarding transactions for schemes in PPF assessment can be found in Appendix A.

The role of trustees in a superfund transaction

Transferring members and assets out of a scheme to a superfund is a significant decision. It is important that the trustees are content that the gateway principles are satisfied and they can provide a rationale for their conclusions.

Trustee due diligence

We are not currently 'authorising' superfunds. Any authorisation regime will only commence once specific superfund legislation is in place. We have, however, established an interim assessment and supervision regime for the period before legislation is in place. Further details of this interim assessment can be found in our guidance for superfunds, and in the superfunds list and assessment.

Trustees should take comfort from our assessment – we do not expect trustees to replicate it. Trustees may, however, wish to make further enquiries of the superfund in respect of the areas we assessed as part of their own due diligence.

It is a matter for trustees, with input from their advisers, to make a judgement on the transaction. In carrying out due diligence and considering options for their scheme, we note that ceding trustees will wish to take an approach proportionate to their scheme circumstances (for example scale or funding level), considering the resources available to their scheme and their employer, and the potential benefit to members and the sponsoring employer. However, in general we would expect due diligence to include the following.

• The trustees have considered other options available to them to improve the scheme’s position. This could include whether the wider employer group is able and willing to contribute more. We expect trustees to provide rationale for their conclusions.
• The trustees understand the scope and timing of our assessment. This should include asking the superfund for the summary outcome of our assessment and making any further enquiries they think necessary. Trustees should also ask whether any material changes have taken place since the date of that assessment.
• The destination superfund is right for the members, given the members’ experience and the scheme’s circumstances.
• Consideration of what the superfund is offering, their associated fees (including all transaction and transition costs), their funding and investment objectives, their methods for implementing and achieving those objectives (including their investment management proposal) and the risks to achieving those objectives. Trustees should also consider the information provided on conflicts of interest to ensure they are satisfied with how these are managed.
• Where member enhancements are being offered, we would expect trustees to undertake appropriate due diligence of these proposals, including professional advice where appropriate.
• The trustees have reviewed with their advisers any modelling outcomes that the superfund produces for their scheme.
• The transfer is in line with the gateway principles and the trustees understand the risks introduced by the transfer, as well as how the transfer to the superfund results in improved member positions.
• Consideration has been given to the risks attached to any residual liabilities left in the scheme, including:
  • being able to explain the due diligence undertaken to assess and mitigate the potential for residual risks within the scheme
  • demonstrating how any residual risks have been mitigated and managed, through the use of insurance or indemnities and data cleansing exercises
  • an additional capital reserve in some circumstances - for example, where concerns around data quality or benefit integrity limit their ability to mitigate residual risks through the use of insurance or indemnities

Assessment of prior potential material detriment

In the clearance application, trustees need to demonstrate they have considered past significant corporate activity for any material detriment, for example mergers and acquisitions or bank refinances. They should also have undertaken a review of any recent significant value extraction from the employer by the wider group or shareholders. We expect ceding employers to provide reassurance to trustees by setting out this past activity and providing confirmation of whether it led to detriment to the scheme.

To the extent that any potential detriment or value extraction is identified, trustees should consider whether the specifics of the proposed transfer to a superfund will mitigate it, and what further or alternative steps might be appropriate. We consider these issues as part of any clearance application. Where the transfer to a superfund is part of broader concurrent corporate activity (for example as part of a sale or merger of the employer), this should be made clear as part of the clearance application.

Advice

We expect a decision to transfer to a superfund to have been subject to appropriate and proportionate discussions and review, including challenge. Ceding trustees should assess their expertise and consider appointing an independent trustee, particularly in view of the complexity of the considerations necessary to proceed with a transaction.

Trustees should obtain appropriate professional advice in considering and undertaking a transfer to a superfund. This will include appropriate and proportionate actuarial and professional covenant advice in relation to their scheme’s current position and the gateway principles, in addition to legal advice. The scope of such legal advice will vary significantly between schemes, but may include:

• advice on conflicts, including trustee and adviser conflicts of interest
• identifying issues where trustees should take appropriate covenant, actuarial and investment advice
• the trustees’ position and ability to make the transfer (or partial transfer)
• the level of benefits trustees are obliged to provide to members, and the fair treatment of members as part of the overall transaction
• any issues the trustees will need to address to ensure they fulfil their legal duties to the scheme, including duties in relation to Guaranteed Minimum Pension (GMP) equalisation³. This could include whether the scheme should be equalised before transferring to a superfund, or whether the superfund has accounted for the additional costs incurred in equalising GMPs.

Scheme members

Given the planned change to their scheme’s circumstances and in relation to their link to the employer, members might consider transferring their pension or accessing their funds by retiring from the scheme when they would not otherwise have done so. This is a critical moment for them, as these are irreversible actions that will have a lasting impact on their retirement benefits. It will not normally be in the interests of members to transfer their benefits to a defined contribution (DC) scheme, and we believe that superfunds meeting our expectations offer a secure destination for schemes and members. Trustees should therefore:

• be open and transparent with members about the planned transfer to a superfund throughout the process
• be clear in communications with members that they have:
  • carried out appropriate due diligence
  • concluded that, in line with gateway principle 3, the transfer provides an increased likelihood of members receiving their full benefits

For any members that may be considering a transfer, trustees should be alert to the risks and support members to make an informed decision in the following ways.

• Ensure communications to members about the transfer to a superfund are clear, accurate, and jargon free.
• Send a joint regulatory family cash equivalent transfer value letter if a member is considering transferring to a DC scheme.
• Consider guidance from the Financial Conduct Authority (FCA), which can help trustees to outline the types of risks members should keep in mind (FCA website).
• Encourage members to consider the risks to help them make an informed decision (FCA website).
• Encourage members to take regulated independent financial advice to understand their options and reiterate the legal requirement for members with pots over £30,000 to seek advice.
• Encourage members to ask their financial adviser (MoneyHelper website) to identify any increased risks associated with how they have decided to access their pension funds.
• Highlight the services offered by MoneyHelper.
• Ensure they are protecting their members from scams and carrying out the appropriate due diligence on any transfer requests in the lead-up to transferring to a superfund. More information on protecting members from scams can be found on our website.

In addition to providing clear and accurate communication to members, if trustees are considering any member options exercises (including incentive exercises), these should be done in accordance with best practice standards and with the appropriate due diligence. Trustees should ensure the following.

• They understand their duties, act in the best interest of all members and manage conflicts where they may arise.
• They seek advice where necessary, scrutinise the advice given and make their decisions accordingly.
• Communication with members should be open and transparent, with adequate time to consider matters and seek advice.
• Member records are accurate and complete.
• Transfer values are calculated correctly.

Consideration of other options available to the scheme

The first two gateway principles focus on buying out with an insurer, but this may not be the only option available. Trustees and employers should consider why it is preferable to move to a superfund than stay with the employer and look for other forms of support to improve member security in the longer term.

Trustees should already be considering these issues as part of their ongoing long-term planning for the scheme, but it is particularly integral if they are considering a transfer to a superfund. Any assessment of options will be likely to include a consideration of cost, security, and the suitability and appropriateness of the arrangement for members.

There are many forms of support available to pension schemes, including other consolidation options such as entering a DB master trust, other capital-backed arrangements, and options that provide access to economies of scale and improved governance and support without immediately severing the employer support. How appropriate these options are will depend on the circumstances of the scheme and employer.

We expect to see some consideration of these options as part of the employer’s application for clearance. To assist with the consideration of other options available to trustees, we are intending to develop guidance on endgame options, which will look at the main issues and risks of these arrangements. 

Footnotes for this section

• 3. Trustees of occupational pension schemes are under a legal obligation to ensure that the benefits due to members do not discriminate on grounds of gender. A major part of this is that normal retirement ages must be the same for men and women, and this applies to both basic scheme benefits and any GMP to which the member may be entitled.

Superfund transaction gateway principles

1. A transfer to a superfund should only be considered if a scheme cannot access buy-out now

Although we expect superfunds will provide a high probability of members receiving full benefits, they will not provide the same level of security as insurers. Therefore, if a pension scheme can access buy-out with an insurer, we expect the trustees to choose this option rather than transferring to a superfund. Access to buy-out will depend on whether buy-out is affordable and, if so, whether the pension scheme can in practice currently access the insurance market.

The trustees’ assessment of whether buy-out is affordable should be based on the ceding scheme actuary’s estimate of the buy-out funding level as at the date when the gateway principles are demonstrated to be met⁴. In demonstrating that a scheme meets this principle, trustees should be prepared to provide a report from their scheme actuary or other appropriate adviser, setting out the estimated buy-out funding level at that date and including:

• the estimated buy-out liability, including the pensioner/non-pensioner split and key actuarial assumptions at the same date
• the asset valuation at the same date
• a reconciliation of the buy-out deficit shown in the latest Part 3 valuation report
• details of any approach made to the insurance market over the last year, including details of any buy-out price(s) quoted⁵

The trustees’ assessment of whether the scheme can access buy-out should be based on the response by an appropriate insurer (ie one indicated by professional advice to be potentially interested in taking on schemes with similar characteristics to the scheme in question). If the insurer declines the scheme or advises that buy-out could not be completed within a reasonable period appropriate for the circumstances of the scheme, then it would be reasonable to conclude that the scheme cannot currently access buy-out. 

2. A transfer to a superfund should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer

As noted above, where a scheme can access buy-out and secure benefits in full, it should do so rather than transfer to a superfund. It therefore follows that if a scheme is within reach of accessing buy-out it is unlikely to be beneficial to members to transfer to a superfund. This will depend principally on the scheme’s funding level and the strength of the employer. We expect that, where trustees conclude that the value the scheme would receive from expected deficit repair contributions (DRCs) under the current schedule of contributions or from an employer insolvency is sufficient to secure buy-out in the foreseeable future, this principle will not be met.

When assessing the prospect of buying out, ‘the foreseeable future’ will be specific to the employer’s circumstances. In general, we would expect this to be a period of up to five years but acknowledge that there may be greater certainty around employer covenant over the first three years. Longer periods are unlikely to provide the clarity trustees need to inform their assessment of this principle. Trustees should provide a rationale for the timeframe they are using.

Whether there is a realistic prospect of buying out will be scheme- and employer-specific, but a key consideration will be how much a scheme expects to receive in the future, and how confident the trustees are that the expected amount will be received.

Demonstration of this principle should be based on an estimate of how the buy-out funding level under principle 1 will progress in future, including progression as a result of the following.

• Asset returns (commensurate with the expected investment strategy and the expected level of investment returns over the projection period).
• Receipt of an appropriate level of employer contributions, for example DRCs and any other previously agreed payments over the period. We expect DRCs to be in line with an appropriate recovery plan that complies with our relevant codes and guidance. We also expect trustees to demonstrate that they have discussed with the employer other ways to improve the scheme’s situation. For example, this may be through additional DRC payments, parent company guarantees or other contingent security, and the trustees and employer have concluded that no further improvement in scheme security can be achieved.
• The buy-out price falling over the next five years as the scheme matures.
• Improvements in pricing that might be achieved through improvements in the quality of the underlying scheme data.

The above will provide an estimate of the progression of the scheme’s buy-out funding level, but trustees will also need to account for the employer’s ability to provide the DRCs and other previously agreed payments over the foreseeable future, and its willingness to improve scheme security without transfer to a superfund. This analysis should be proportionate to the size of the scheme and complexity of the employer covenant position.

Trustees should be continually monitoring and assessing the strength of the employer covenant as part of their integrated and ongoing approach to managing scheme risks. Given the significant impact of a transfer to a superfund on the nature of the covenant offered to the scheme, we expect an independent covenant assessment conducted by professional covenant advisers to be a key component of trustees’ considerations. In selecting an independent covenant adviser, trustees should satisfy themselves that their chosen adviser has the relevant expertise and experience to advise on gateway principles 2 and 3. 

There may be particular, exceptional circumstances where trustees may decide not to take professional covenant advice. We expect them to clearly explain the basis for this decision. 

We expect the covenant advice to clearly set out the conclusion of the analysis and the matters considered, such as:

• the employer’s market and strategic position, prospects and profitability
• what constitutes ‘the foreseeable future’ given the specific circumstances of the employer
• the insolvency risk of the employer within the foreseeable future
• the estimated return to the scheme upon a hypothetical insolvency of the employer
• the employer’s ability to pay the contributions it is legally compelled to provide
• the employer’s capacity to pay additional contributions and an assessment of the contributions that the trustees could otherwise reasonably be expected to obtain, to inform discussions with the employer concerning increasing DRCs and/or providing additional support

3. A transfer to the chosen superfund improves the likelihood of members receiving full benefits

In addressing this principle, we expect trustees and their advisers to consider the issues carefully based on their experience, supported by appropriate and proportionate quantitative analysis. In some instances, we anticipate the benefit to the scheme from transferring to a superfund may be clear – for example, where there is an imminent risk of the employer entering insolvency and the scheme’s funding level is significantly below the estimated buy-out funding level. In other instances, the merits of the transaction may be finely balanced, and the judgement and experience of trustees and advisers will be particularly necessary.

Our capital requirements for superfunds provide a high probability of paying member benefits and it is likely that superfunds will be better funded than many pension schemes. Where the covenant is provided by a weak employer, trustees’ justification for the transfer may be relatively straightforward. In other instances (for example where the current covenant is strong and robust), addressing this principle will require more detailed analysis.

At the outset, when considering whether the transfer improves the likelihood of members receiving full benefits, trustees will have to compare two elements.

1. The likelihood of members receiving full benefits with a superfund
2. The likelihood of members receiving full benefits if the scheme remains with the employer.

Comparing these two elements may not be straightforward. Trustees should ensure they have sufficient information and clear and comprehensive professional advice in making their judgement. Trustees should also ensure that the advice and underlying assumptions are consistent across the three gateway principles. There are a range of market/industry information and tools available to help inform the trustees’ judgement, and this is an area where professional advisers will be able to further support trustees and employers. As the market for advice in this area develops, we will continue to evolve our approach to gateway principle 3 in line with market innovation.

For superfunds we have assessed, the first element will be clearer for trustees because the superfund should be able to provide the trustees and their advisers with full and transparent details of their offering. This should include their funding and investment objectives, and their methods for achieving them. In meeting our interim capital requirements, we expect superfunds to demonstrate that there is a high probability of members’ benefits being paid in full (even if that superfund decides to withdraw from the market in the future).

In assessing the second element, trustees will need to consider their current funding and investment strategy and how they expect this to change over time as the scheme matures. In doing so, they should consider the impact of it not progressing as expected, for example due to adverse (or more favourable than expected) investment experience. This will involve judging how the employer would respond in adverse circumstances and what additional opportunities might arise if the scheme experience was more favourable. Trustees should consider the methodology the superfund is using, and ensure it is consistent with the methodology they are using to assess their scheme’s expected funding progression to enable a consistent comparison of outcomes.

Having compared the likelihood of members receiving full benefits under the status quo, and in the superfund, trustees will also need to consider whether transferring will improve the security of members’ benefits over time. In doing so, trustees should take into account a range of factors, including the following.

• The trustees’ current view of their employer’s short- to medium-term covenant (and/or credit rating, if available). Areas trustees may want to consider in assessing their employer’s covenant and financial support can be found in our employer covenant guidance.
• Their employer’s sector, the markets it is operating in, and any emerging trends within these.
• Any other future potential external risks for the employer (for example, legislative change or significant refinancing of debt).
• The impact of downsides on the superfund and the employer, and the ability of both entities to continue to support the scheme in these events. This should include consideration of what recourse the scheme could have to the sponsoring employer and wider group if the scheme remains with the employer.

Trustees may commission modelling demonstrating the respective security of members’ benefits being secured in full for remaining with the employer and transferring to the superfund. This will require a qualitative overlay of the covenant risk outlined above. The above is not an exhaustive list, and which factors are considered and in what level of detail will depend on the individual circumstances of a scheme. Trustees should seek independent covenant advice and assess what their covenant adviser can offer, and whether it is appropriate and proportionate for their scheme’s circumstances.

It may be that, from an analysis of comparative funding levels and employer covenant, there is a clear improvement for members. In situations where a proposed transfer meets principles 1 and 2, but the trustees’ analysis of funding levels and employer support do not indicate a clear improvement in transferring in respect of principle 3, the following considerations may be important deciding factors in whether a transfer improves the likelihood of members receiving full benefits.

• The prior behaviour of the sponsoring employer, and what indications that provides as to their willingness to support the pension scheme in the long term.
• Any improvements in governance or available resources that consolidation may bring, including why those improvements cannot be achieved with the current employer or through adjustments in the current scheme implementation arrangements.
• Any improvements due to economies of scale, such as access to a broader range of assets or improved returns (particularly for very small schemes).
• The availability of other superfunds or other capital-backed arrangements, and consideration of the costs and objectives of those other arrangements in relation to the requirements of the scheme and its members.
• The availability of other market consolidation options (for example, DB master trusts) which could lead to improved outcomes.

Footnotes for this section

• 4. Where a clearance application is not appropriate or possible, we will still expect trustees to demonstrate to us their rationale for transferring to a superfund rather than buying out with an insurer, as well as considering the points set out in ‘The role of the trustee in a superfund transaction’ section. In these scenarios, the date of this submission should be used.
• 5. We do not expect trustees to seek a quotation from an insurer for the purpose of determining whether buy out is affordable. However, any such quote that has already been obtained, or is readily available, could usefully supplement more generic information the ceding scheme actuary or their firm may have relating to buyout costs and assist with their estimate.

What prospective ceding trustees and employers can expect from us

We expect trustees to be able to evidence their consideration, and the steps they have taken to satisfy themselves that the proposed transfer meets the above principles. We have set out above how trustees may go about developing an evidence base, and the types of issues they should consider when making their decision.

We believe superfunds can be a good option for some pension schemes. Whether a transfer to a particular superfund is a good option will depend on the particular circumstances of a ceding scheme. Superfunds also present a range of potential risks, but in setting clear standards for how superfunds should operate, the level of capital they should hold, and through ongoing supervision of these areas, we believe the potential risks to savers will be substantially reduced.

As part of our assessment of a clearance application, we will therefore look at the process leading to, and the rationale for, the trustees’ decision to transfer.

Once a clearance application and accompanying evidence have been submitted, applicants should allow at least three months for a decision to be made⁶. Trustees and employers should notify us as early as possible that they are considering transferring to a superfund. This will allow us to start our engagement with them at the earliest possible stage. As part of the process, employers will be able to submit a draft clearance application to allow us to discuss issues arising at an early stage and raise any queries related to their circumstances.

At the same time as assessing an application for clearance, we will engage with the relevant superfund in a supervisory capacity to ensure it meets our expectations. Early notification of the trustees’ intentions will also therefore assist us in carrying out our assessment of their chosen superfund in a timely manner. 

For each superfund’s initial transaction, we will also be completing our assessment of the superfund. More information regarding our initial assessment of a superfund can be found in superfunds list and assessment.

Footnotes for this section

• 6. This period relates to superfunds we have already begun to assess when ceding trustees approach us. For unassessed superfunds, the time period will be significantly longer.

Appendix A

This appendix provides further detail on scenarios where we would expect our guidance to apply for superfunds and other capital backed arrangements, including:

• schemes in PPF assessment
• entering into other arrangements where there is no immediate severance
• post-insolvency situations involving a capital-backed arrangement
• partial transfers to a superfund

Schemes in PPF assessment

A decision to transfer to a superfund after exiting PPF assessment will be made in a slightly different context to a decision to transfer to a superfund from an existing employer. Trustees will likely have only two options.

1. Buying out with an insurer at the current funding level, or
2. Transferring to a superfund, with the intention of expecting to secure full benefits for members.

If trustees are considering transferring to a superfund on exiting PPF assessment, they should notify the PPF and us at the earliest opportunity. A clearance application may not be appropriate or possible for a scheme in PPF assessment. However, we will still expect trustees to demonstrate to us their rationale for transferring to a superfund rather than buying out with an insurer. Trustees should also demonstrate that they have considered the points set out in The role of trustees in a superfund transaction.

We acknowledge that for schemes in PPF assessment, an employer may not be able or available to pay for the professional advice the trustees need as part of their consideration of any proposed transfer. Trustees should be mindful from the outset of the costs that could be incurred in working through an initial feasibility assessment. This should include detailed due diligence and, if appropriate, implementation and the potential impact those costs could have on the level of members’ benefits. We would expect to see the following.

• An initial feasibility assessment for a potential transfer to a superfund to be payable from scheme assets.
• Detailed analysis on new and innovative structures and methodologies for transferring to a superfund to be met from third party funding and not scheme assets.
• An assessment against the gateway principles. When undertaking due diligence on the transfer and destination superfund, this should include whether the destination is right for members, and whether it is to be met from scheme assets, subject to the agreement of the parties.

Given legislative restrictions on exiting during the assessment period, the PPF expects all schemes to complete the PPF assessment period in the usual way before transferring to a superfund, unless a scheme rescue occurs. Scheme tasks carried out during the assessment process will generally support the work needed for a transfer. In particular, as part of the assessment period process, the PPF requires a full data cleanse to be carried out in order to establish the correct asset and liability position.

The PPF commonly experiences issues with data quality and uncertainty as to member benefit entitlements. The work needed to rectify them can be considerable and can result in changes in the liabilities. A robust data cleanse reduces scheme data and liability uncertainties and enables more accurate pricing of the liabilities to take place. The PPF would also expect that, in the majority of cases, a specialist adviser on the PPF panel is utilised.

Section 7.3 of our superfunds guidance sets out our expectations for capital adequacy. The overarching objective of those expectations is for there to be a very high probability (99%) of members’ benefits being paid in full. For schemes in PPF assessment, where members are faced with a certain reduction of their benefits to a PPF+ level, we accept that trustees may reasonably conclude it is in members’ interests to transfer into a superfund, even if the expectations of section 7.3 are not fully met in every respect.

In these circumstances, we expect trustees to weigh up the likelihood of members ultimately receiving more than the level of PPF + benefits they could secure with an insurer. We would also expect trustees to be confident that the level of benefits members might receive would represent a material improvement.

We would expect trustees to set out how they satisfied themselves that the transaction would be in members’ interests. To support this, trustees should document their consideration of the risks in the context of the scheme, scheme membership and individual cohorts of members. Trustees should also document their consideration of the impact of any profit release mechanism which is not in accordance with section 7.3 of the guidance for superfunds.

Entering into other capital-backed arrangements

Typically, capital-backed arrangements entail a commercial contract where third-party capital supports the delivery of a range of expected outcomes for the scheme at the end of an agreed period. The capital supports investment risk being taken and generates returns for the investor.

The extent to which we expect such arrangements to comply with our superfund guidance, depends on their design, whether the scheme retains the link with the existing employer and the circumstances in which they are being implemented. For further information on which aspects of our superfunds guidance apply to groups 2 and 3 (below), we would encourage trustees to engage with us once there is a firm commitment to consider an arrangement.

Group 1 – Provides capital to support investment performance

The employer remains in place and its obligations in respect of the scheme are unaltered. We view these as investment products. We expect that schemes in Group 1 will have a very low probability of future employer insolvency. However, we expect trustees to consider the impact of an insolvency scenario on their arrangement and how that risk might be monitored over time. The terms of the arrangement should therefore include, how the arrangement would comply with the superfund capital expectations, and how the scheme governance arrangements (including for example, administration and investment) would enable the scheme to continue to be run if an insolvency did occur. In the unlikely event that a scheme with a capital backed arrangement changes from Group 1 to Group 3 in the future, we would not expect the original terms of the capital backed arrangement to materially change.

Group 2 – Substitutes for solvent employer covenant

The original employer is substituted with a special purpose vehicle (SPV) employer while it is still a solvent ongoing entity. The scheme is separated at the outset of the arrangement from its existing covenant support, which is replaced by a capital buffer. We would expect capital expectations under 7.3 in our main guidance to be met.

The transaction could be a Type A event under our clearance guidance.

For transactions under Group 2, given the replacement of the employer, we would expect a high probability of benefits being paid (ie 99%). For these transactions, trustees’ decisions could include a comparison of hypothetical insolvencies over a range of time periods, taking into account the support the arrangement would give and what the scheme would expect to receive on insolvency without the arrangement. Consideration should also be given to potential failure of the third-party provider.

Group 3 – Enables scheme to run on following insolvency

A SPV employer is introduced to enable the scheme to run on after an insolvency event has occurred, supported by a capital buffer.  Where the arrangement takes effect before insolvency, we would expect capital requirements expectations under 7.3 in our main guidance to be met. Where insolvency occurs after an arrangement takes effect, we would not expect the terms of an existing agreement to materially change.

In other cases, while terms may be agreed between the parties, the arrangement would not take effect unless insolvency occurred. Alternatively, discussions with a provider might only start, with terms agreed, post insolvency. See ‘Post insolvency situations’ section below for detail on our position on capital adequacy in these scenarios.

Position of the SPV employer under a capital-backed arrangement

Typically, the SPV employer will:

• have no connection (present or historic) to the scheme’s members, in any real sense
• be connected in some way with the providers of capital, with whom the scheme is in a commercial relationship involving conflicting financial interests

The trustees should consider all the powers of an employer under the scheme and the extent to which they would be appropriate for the SPV employer. Some powers may need to be transferred to the trustees and safeguards or conditions placed around others. Trustees should ensure they are able to bring about the insolvency of the SPV employer and PPF entry in appropriate circumstances.

Post-insolvency situations involving a Group 3 capital-backed arrangement

Following insolvency of their employer, well-funded schemes normally either effect a buyout with an insurer (securing full benefits if funding permits, or “PPF+” benefits otherwise) or, if poorly funded, enter the PPF with benefits being reduced to PPF level.

Trustees of schemes with insolvent employers may seek to improve their funding level over a period of time and improve the level of benefits they can provide to members over PPF+ levels. This could be achieved by transferring the scheme from PPF assessment to a superfund or to another arrangement (see Group 3 above).

Section 7.3 of our superfund guidance sets out our capital adequacy expectations. The overarching objective is for there to be a very high probability (99%) of members’ benefits being paid in full. For schemes in PPF assessment, where members are faced with a certain reduction of their benefits to a PPF+ level, we accept that trustees may reasonably conclude it is in members’ interests to transfer into a superfund or enter into a Group 3 capital-backed arrangement, even if the expectations in section 7.3 are not fully met in every respect.

There are some elements we expect trustees to consider as part of their due diligence in this type of transactions, based on the specific circumstances of their scheme.

Weighing up risks: Weigh up the likelihood of members ultimately receiving more than the level of PPF + benefits they could secure with an insurer. We would also expect trustees to be confident that the level of benefits members might receive would represent a material improvement.

Trustees should set out how they have satisfied themselves that the transaction on lower capital adequacy terms would be in members’ interests and how they have reached their conclusion that there is sufficient protection for members against the risk of ending up with lower benefits than with an immediate PPF+ buy-out. To support this, trustees could document their consideration of the risks in the context of the scheme, scheme membership and individual cohorts of members.

As previously set out above, we would expect trustees to be mindful from the outset of the costs that could be incurred when considering these types of arrangements.

We expect there to be a wind-up trigger at a level that is set in accordance with section 7.3.3 and an enforceable mechanism to allow buffer assets to pass to the scheme. We would also expect trustees to consider if any additional protection is necessary to ensure that they have a degree of oversight before the funding of the scheme deteriorates to a level in which assets need to be passed to the scheme. If ceding trustees consider it appropriate for any capital to be released when not all our expectations in section 7.3 are being met, then we would expect there to be alignment between the capital release threshold and the scheme’s funding position as it progresses through the milestones on the agreed journey plan.

Partial transfers to a superfund

Where a scheme is not able to buy out all members’ full benefits with an insurer or transfer all members to a superfund, the trustees and employers might consider transferring a defined group of members to a superfund (a partial transfer). In such a situation, the gateway principles should still be applied.

As with any transfer to a superfund, the objective should be to improve the likelihood of all members receiving full benefits. However, in these circumstances, we acknowledge that there might not be the same level of improvement for all members. The trustees should consider the options available to them and be able to explain why a partial transfer is the best option in the circumstances of their scheme.

This is a complex area, and trustees should consider taking legal advice in relation to their duties to their members when treating groups of members differently. It will be particularly important for trustees to understand their duties in relation to different groups of members, and ensure they are treated fairly (in addition to the points set out in the role of trustees in a superfund transaction).

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