Articles - Supporting innovation in DB superfunds for better outcomes

Protecting savers, enhancing the pensions system and supporting innovation are central to our work. Key to all three of these pillars is having fewer, larger, better run schemes that provide a choice for trustees to improve or consolidate, where they cannot meet our expectations. This is how we improve outcomes. A key area of innovation is the defined benefit (DB) superfund market. They have the potential to provide better outcomes for members through increased security, improved governance and risk management.

 By Louise Davey, Interim Director of Regulatory Policy, Analysis and Advice at TPR

 They also have the potential to offer economies of scale and the ability for schemes to access a wider set of investment opportunities.

 We were very pleased to see that last month, Department for Work and Pensions (DWP) announced their plans for a long-term legislative framework for superfunds. Legislation in this area is in everyone’s interests and we look forward to working with DWP as they bring this to fruition. We also welcome the DWP’s call for evidence on ‘Options for Defined Benefit schemes’ which includes discussion of consolidation options for a broader range of DB schemes.

 However, the framework will take time and we want trustees and employers to be able to take advantage of the opportunities that superfunds can offer now. This is why we published guidance in 2020, which set out our expectations for superfunds that wanted to operate in the market and guidance for trustees and employers considering moving their schemes to a superfund.

 When we published our guidance, we committed to review the issue of profit extraction within three years. But many things have changed in the last few years. The industry has had to deal with the longer-term market impacts of COVID-19 and material changes in yields and inflation. As a result, the superfund market is yet to really get going.

 Given the wider economic challenges, and with more clarity on the direction for the longer-term regime and our learnings from working on the assessment process since 2020, we believed it was right that we widened the remit for our guidance review to make sure that our superfund regime remains fit for purpose.

 To inform this, and to make us aware of market barriers, we ran an engagement exercise with industry stakeholders earlier this year. I’d like to thank those who responded, your input was invaluable.

 It was clear from that engagement that there were areas we could consider further to help foster this market moving forwards while keeping saver security at its heart. We are pleased to be able to share the results of that and revised guidance.

 The key areas where we have amended our guidance are:
 Changes to ease the way for schemes transferring to a superfund. This includes extending the period for the Gateway, being clearer when we think it right that a scheme can consider transfer to a superfund, and allowing for more time to demonstrate that our expectations for capital have been met.
 Changes to our funding expectations. Amending the discount rate from Gilts+0.5% to Gilts+0.75% reflecting changes in the market but maintaining saver security as paramount.
 Signalling a change in our position on profit extraction. We want to engage further with industry on how this will work to help create a system that works for both providers and members. We will issue an update in due course.
 Greater clarity on some of our expectations for the assessment process.
 Putting members first
 Through our review, we have kept saver security as our primary focus, whilst creating changes that should allow for the development of a superfund market. Trustees will be faced with some complex decisions and will need to obtain appropriate advice to enable them to make an informed decision and to help to ensure that they act in the best interests of their members.

 The potential for superfunds to operate alongside other risk transfer and management options offers the potential for a diverse marketplace. We know that superfunds are just part of innovative developments in the DB marketplace and later this year we will publish guidance focussed on other arrangements as well.

 There is more to do here but we are committed to enable innovation in DB which puts better saver outcomes at its heart.

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