Commenting on TPR’s new interim regime for the emerging superfund pension market, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says:

“Today’s interim guidance for superfunds from TPR is welcome and should help kickstart the market ahead of a longer term authorisation regime. The main block to commercial consolidators taking off to date has been the delay to the authorisation regime.  Whilst there has been a theoretical interim regime in place for 18 months now, transactions have not happened.  In part this has been due to nervousness around consistency between the interim regime and where the final regime might land.  Furthermore the viability of consolidators is undermined when there is no visibility on the long term authorisation regime.

“The fact that TPR has now issued updated guidance which appears to align with a longer term legislation and authorisation regime suggests TPR and DWP are joined up on the direction of travel.  This gives the market far more confidence on the long term viability of consolidators and will provide the impetus that leads to the initial transactions into consolidators.

“This guidance is particularly helpful given that Covid-19 will lead to more corporate insolvencies.  Some of the schemes in this situation may now be able to secure a higher level of member benefits than before.  PPF+ cases, where a scheme is fully funded on PPF so does not fall into the PPF, but is insufficiently funded to buy-out full benefits, stand to benefit.  If they can secure 95p in the £ with a consolidator, or 90p in the £ with an insurer, then trustees need to weigh up the higher benefit level with the lower level of security in a consolidator. This benefit coverage vs security point means there does need to be clear water between consolidator pricing and insurer pricing for consolidators to provide a genuine alternative to insurance.  The proposed capital requirements have been set at a level where this looks like this should be achievable, particularly for more immature schemes.

“We welcome the gilts + 0.5% discount rate and intervention trigger being kept under review by TPR.  Having a fixed margin above gilts yields is simplistic and could lead to unintended consequences, such as triggering the intervention threshold (which tips all the capital into the scheme) when credit spreads widen for what might be a temporary period.  It is also good to see a shift in the long term objective for superfunds from potentially having to target buy-out (one of the options in the DWP consultation) to instead targeting run-off. This will allow a range of superfund models, driving innovation and choice for the market.

“Despite the progress, there appears to be a block on investors extracting value until benefits have been bought out, at least for the first 3 years.  If this were to stick longer term, it would seem inconsistent with the capital adequacy proposals, and likely to be problematic for some models. Interestingly the guidance also covers capital backed solutions that do not initially sever the link to the employer covenant at the point that covenant is severed.  This may well impact on the structure of new capital backed solutions coming to market.”