Consultation seeks view on new legislative framework for authorizing, regulating consolidation of defined pension schemes into a superfund for improved funding.
Follows DWP Mar. 2018 white paperprotecting defined benefit pension schemes.
Advantages
Security through capital buffer reduce any risk from future employer insolvencies.
Alternative allowing employers to move closed pension schemes into a superfund.
Improved chances of full benefits being paid allows wider innovative investments.
Proposals
Superfunds required to seek authorization from TPR, otherwise unable to operate.
To cover the TPR authorisation cost, proposal includes introducing application fee.
Paper also sets out proposed criteria for TPR to grant authorization to a superfund.
Effectiveness
Consultation period begins on Dec. 7, 2018 and runs until Feb. 1, 2019.
TPR Expectations
On Dec. 7, 2018, TPR issued guidance setting out expectations of DB superfunds.
TPR intend for expectations to operate before authorization regime is put in place.
And whilst authorisation framework planned by government is under consultation.
Reflect the consultation proposals regarding criteria proposed for an authorization.
In addition, TPR issued guide for trustees considering transferring to a superfund.
Feb. 2019 PRA Response
On Feb. 5, 2019, UK PRA issued response to UK GVT consultation on DB pensions.
Agree regulatory regime is needed for defined benefit pension (DB) consolidators.
The pension promises which are made by DB schemes are very similar to annuity products, and profit-seeking DB consolidators are similar to insurance companies.
Regulation will help to solve tension between the members’ security and investors.
Regulation of consolidator will need to include robust framework for authorization.
Important that regime to support vital long-term services is well thought-through.
PRA response considers further analysis that could help develop regulatory regime.
Focuses on five key areas: financial sustainability, future transfer of DB schemes from consolidators to insurers, authorization, supervision, reporting / disclosure.
Risks faced by DB consolidators are similar to those managed by insurance firms providing annuities, insurance firms may want to enter DB consolidation market.
May be unintended consequences if 2 types of business are regulated differently.
Framework could require consolidators to calculate prudential requirements using same methods as insurers / have found the insurance framework to be effective.
It is very challenging to minimize the risk of arbitrage between regulatory regimes.
CP includes option that consolidators act as a bridge, until schemes strong enough to buy annuities and think this would be the most effective in mitigating arbitrage.
Note and support the development of a robust authorization / supervision regime.
Would argue that insurance framework provides appropriate model for protection.
And would encourage further analysis of how to meet the desired policy objectives.
On Jun. 18, 2020, UK TPR launched superfund pension interim regime, see #79985.
Jul. 2023 UK GVT Response
On Jul. 11, 2023, UK GVT issued its response to DB scheme consolidation consultation.
Vast majority of responses were supportive of proposals, and keen to see superfunds up, running and regulated in UK, setting up system will ensure they operate securely.
UK GVT commits to having permanent, regulated regime for superfunds as soon as parliamentary time allows, expects significant investment as superfunds develop.
Sets out schemes in scope of superfunds, trying to reach schemes that cannot yet access full insurance buyout, but are also suitably funded prior to the capital injection.
As well as funding level, other factors include size of scheme and employer covenant.
UK GVT will not mandate that a superfund is either sectionalized or co-mingled.
Superfunds will be authorized and supervised by UK TPR, which currently oversees interim regime, UK GVT will use any lessons from this to build the permanent regime.
Systems/processes to be put in place for governance, including risk level, intervention triggers, profit trigger, wind-up trigger, with proposed ladders of intervention.
Financial sustainability and capital adequacy will be most critical part of framework.
UK GVT intends that the primary legislation will provide for a new compulsory framework applicable to superfunds and other relevant models of consolidation.
Secondary legislation will set out further details, this will enable greater flexibility to respond to the changing market and enable more detailed consultation with industry.
In Sep. 2023, UKP issued letter to UK PRA on role of consolidators, see #184824.
