Defined benefit pension scheme consolidation

In 2018, the Department for Work and Pensions (DWP) launched a consultation on a proposed regulatory framework for pension superfunds. Such funds would consolidate smaller defined benefit (DB) pension schemes under the roof of one superfund bringing about economies of scale, better investment opportunities, and safer and better outcomes to savers and the UK economy as a whole, respectively. Concurrently, superfunds could serve as a viable tool for employers to move their pension liabilities off their books when a buyout isn’t possible.
Back in 2018, the DWP proposed a framework which would entail rules on
– the authorization of such funds and corresponding authorization criteria;
– the fit and proper requirements of relevant persons;
– governance requirements;
– reporting and disclosure requirements, and many others.
Additionally, the consultation considered some general issues in this matter such as
– who should be the regulator of such superfunds,
– which schemes should be able to transfer their assets into the funds; or
– how should such superfunds be named.
The proposed framework was high level in nature which means that no individual rule modifications were proposed in this context.
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The Department has now published a corresponding response paper which summarizes the feedback the Department has received to this consultation and the DWP’s way forward on this matter.
#### Summary of responses
The vast majority of responses to the consultation favored the proposed new framework. In fact, most commenters can’t hardly await to witness the establishment and regulation of superfunds within the UK due to the perceived benefits from such schemes. While there were mixed views on various issues, such as the capital requirements for such funds – many respondents noted that Solvency II requirements should apply to such funds as well, or the control mechanism to monitor investment risks of such funds, or the criteria smaller schemes must fulfill to transfer to a superfund, most respondents agreed on the notion of establishing superfunds.
#### The way forward
Based on the feedback provided, the DWP has decided to go ahead as proposed and come up with this new regulatory framework, the details of which will be consulted on in due course. Some of the key pillars of the new framework are described in the following section.
#### Proposed Regime for Superfunds – Key Features
(1) Schemes in Scope
The proposed superfund regime aims to attract pension schemes that are not ready for full insurance buyout but are adequately funded to avoid excessive risk. The following graphic illustrates the schemes envisioned to be included in a superfund:
Graphic 1: Schemes to be in scope for superfund transfers

(2) Size Consideration
Initially, superfunds will initially focus on larger schemes due to the need for rapid scaling. However, potential exists for smaller schemes to follow in the future.
(3) Regulatory Framework
A balanced regulatory framework is vital to ensure the success of superfunds. An overly restrictive approach would limit market growth, while a thriving superfund market could infuse significant capital into the economy. Therefore, the Department plans to keep the new framework flexible, sufficiently regulated to ensure financial market safety, but sufficiently unrestrictive to foster innovation and capital market growth.
(4) Superfund Definition
The DWP envisions the following superfunds to have the following characteristics – as quoted. A detailed definition will follow in the future:
– is an occupational pension scheme set up for the purposes of effecting consolidation of DB pension schemes’ liabilities;
– the link to a ceding employer is severed or substantially altered following the transfer to or by the involvement of the Superfund;
– the ‘covenant’ is replaced by a capital buffer provided through external investment that sits within the Superfund structure. The capital buffer in the context of Superfunds is the money ringfenced by the employer and investors to replace the covenant for the scheme; and,
– there is a mechanism to enable returns to be payable to persons other than members or service providers.
(5) Supervision and Authorisation
The plan of the DWP is for The Pensions Regulator (TPR) to grant authorization to superfunds and oversee their activities. This oversight and approval process will involve verifying that superfunds are UK-registered corporate entities and are subject to the authority of UK regulatory bodies and courts. Furthermore, the TPR will ensure that „trustees have taken appropriate legal, actuarial, investment and covenant advice when determining the suitability of consolidation into a Superfund“.
(6) Financial Adequacy
Although superfunds aren’t traditional defined benefit schemes, they are still pension schemes and will be subject to financial requirements within the framework. While certain aspects of the Solvency II approach can be integrated to mitigate risk, the expectation of the DWP is not for superfunds to adhere to Solvency II capitalization standards.
As a result, the suggested financial requirements for superfunds involve an annual balance sheet approach. This approach includes technical provisions (TPs) established through a best estimate approach to cash flow projection. It also incorporates a discount rate based on a prudent assessment of expected returns using a low-risk strategy similar to a „low dependency investment strategy.“ To align with interim requirements set by TPR, the TPs will encompass an explicit longevity reserve for prudence and a suitable reserve to cover member expenses.
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Please note: the above summary only describes the key features that the DWP has described. For more detailed, comprehensive information, please refer to the enclosed original comment document.