The Pensions Regulator’s new interim regime for superfunds sets out the initial framework for the authorisation and regulation of superfunds. Although superfunds are already in existence (with transactions waiting in the wings), the publication of the Pensions Regulator’s guidance has sounded the starting gun for superfund transfers.

Background to the interim regime

We had expected this year’s Pensions Scheme Bill (which is currently working its way through the House of Lords) to introduce specific legislation for superfunds. Given the omission of superfunds from the Bill, employers were left with little comfort that a superfund transfer would not lead to the Pensions Regulator exercising its moral hazard powers against an employer.

Strictly, pensions legislation in its current form does not prohibit transfers to a superfund. What the Pensions Regulator’s interim regime provides is an approved route for employers to transfer their DB scheme to a superfund, namely by way of a successful clearance application to an authorised superfund.

Key points to note in the Pensions Regulator’s guidance

The Pensions Regulator expects employers to apply for clearance before transferring their DB scheme to a superfund (as a transfer is considered to be a new category of clearance Type A event). Although a well-trodden path, clearance is not a particularly common process for most DB schemes, with the number of clearance applications having dropped significantly since the process was first introduced. Clearance from the Pensions Regulator does not amount to approval, but a legally binding assurance that the Pensions Regulator will (provided certain conditions are met) not use its anti-avoidance powers in relation to the transaction. Clearance is not obligatory, however employers that choose not to seek clearance risk the Pensions Regulator exercising its moral hazard powers. The Pensions Regulator indicated in the context of the introduction of the Pensions Scheme Bill that it intends to review its clearance guidance, so it may be that the process will become more streamlined and predictable for employers and their advisers.

Superfund transfers are more complicated from a trustee’s perspective. The interim regime raises questions of trustees, as ceding trustees’ due diligence and views will be sought from the Pensions Regulator as part of a clearance application. As a clearance application does not provide trustees with comfort that a transfer is in accordance with their duties or protect trustees from a later member challenge, trustees will still need to think carefully about whether the transfer is in their members’ interests. As the Pensions Regulator’s guidance is currently focused on the requirements for superfunds, it is hoped that further guidance will turn the attention to the difficult question for trustees – however compliant the superfund might be, is it consistent with their duties to make the transfer?

The Pensions Regulator considers it inappropriate to clear a transaction involving a superfund until it has assessed the superfund against the relevant criteria. As a result the guidance sets out the requirements that a superfund must meet. These include a prudent set of minimum technical provisions set by the Pensions Regulator, and other standards reminiscent of the Pensions Regulator’s master trust authorisation regime, including governance and personnel requirements. Not only are these requirements relevant for superfunds seeking authorisation but the Pensions Regulator has made it clear that trustees should only consider using a superfund once the Pensions Regulator has completed its assessment. As there appears to be no fixed timetable for the Pensions Regulator’s assessment, it is unclear how long it will take for superfunds to receive the relevant approval.

Changes to come

There is no predetermined timetable for the Pensions Regulator’s or the Government’s next steps in respect of superfund regulation. Although the Pensions Regulator’s guidance has immediate effect, the Pensions Regulator notes that there is more detailed guidance to come, in particular in respect of the minimum technical provisions it has set, its monitoring and reporting requirements and the protections required of superfunds’ legal documentation. The Pensions Regulator also flags that it may flex its expectations and change its guidance as new entrants join the market. In short, in the absence of specific legislation, the interim guidance in its current form is far from the final position.

We do not expect specific superfunds legislation will be introduced until next year, at the very earliest, given the current strains on Parliament’s time and the omission of superfunds from the current Pensions Scheme Bill. Therefore schemes, superfunds and their advisers will be left to grapple with changing guidance on superfund transfers for some time to come, in the context of a legal regime that has not been adjusted to deal with this development.

Read Rosalind and Aneliese’s article in Pensions Expert.