Could ‘superfunds’ play a role in the post Covid-19 recovery?
18th June, 2020
It is now 18 months since the government consultation on the consolidation of defined benefit (DB) pension schemes and legislative framework for authorising and regulating DB ‘superfunds’. Whilst there has been a huge amount of discussion about the role that superfunds could play in the DB universe, in terms of deals, it seems as though there is a continuing ‘failure to launch’.
With shops re-opening and thoughts now turning to the economic recovery following the coronavirus pandemic, could superfunds soon become both a reality and a mainstream part of the pensions industry?
Some commentators, and not just those working for superfunds themselves, are beginning to think so.
Spookily, at the very time of writing this blog, The Pensions Regulator has just published a ‘tough new interim regime for emerging superfund pension market’.
By way of reminder, a superfund is a commercial consolidation vehicle for individual DB pension schemes allowing employers to sever links with their DB schemes and take them off the company balance sheet. The mechanics can appear quite complex, as illustrated below, but a simple way to visualise superfunds is that the end result for scheme sponsors is analogous to a buy-out at, potentially, a much lower cost. Of course, that is not to say that there will be no cost; for some employers, the superfund cost may still be as much as an impediment as the cost of buy-out. And, for members being transferred to a superfund, the expectation is that they will have a greater chance of receiving their promised benefits but without the security of an insurance company covenant.
So, what has changed to make people think that superfunds may be about to take-off?
Simply put, it is the current and prospective impact of the pandemic on the integrated risk management of DB schemes and the impact on employer covenants in particular.
Many companies are already using easements from The Pensions Regulator to suspend their pension contributions and many will still struggle to fund their pension schemes as we return to the ‘new norm’ and job retention subsidies cease. The proposed new funding code for DB schemes could make life even harder for some employers if the effect is pressure for more money to go into more schemes more quickly.
Despite initiatives to promote business rescue, such as the Corporate Governance and Insolvency Bill, unless there are more options to de-risk DB pensions at an affordable level, a spike in the number of schemes transferring to the Pension Protection Fund, as occurred in the wake of the 2008 credit crunch, seems inevitable.
If companies can more easily sever their links with, usually, legacy DB schemes, it might help them on the road to recovery or increase opportunities for corporate transactions that could save businesses and jobs. At the same time, rather than being transferred to the Pension Protection Fund, members whose schemes are transferred to a superfund should have a greater chance of receiving their benefits in full.
Whilst perhaps a little aspirational, the Social Market Foundation, a cross-party think tank, has also called on the government to encourage the creation of pension superfunds to invest in infrastructure, thereby supporting economic recovery as we start to emerge from the COVID-19 pandemic. Trustees, on the other hand, including those responsible for the stewardship of superfunds, may have reservations about this; in particular, on grounds of lack of liquidity in infrastructure.
If the pandemic acts as a catalyst to get the superfund regulatory framework in place (and it is worth noting that substantive new legislation is not a pre-requisite to this) then superfunds, could play a role in the post COVID-19 recovery.
Of course, trustees of DB schemes will need to be convinced about security of their members’ benefits following transfers to superfunds. Insurance companies are still likely to be considered the ‘gold standard’ when it comes to risk transfer and, when options are being considered, due diligence should compare the member position in the various scenarios – own scheme versus superfund versus insurance company.