Superfunds are a hot topic right now in the pensions industry. A consultation on the regulation of superfunds has recently closed, and a response from the Government is expected in the near future. But what are superfunds, and why might they be of interest to an employer with a defined benefit (DB) pension scheme?

What is a “superfund”?

  • A superfund is an occupational pension scheme which will, at a cost, accept a transfer of assets and liabilities from a DB pension scheme.
  • It’s a relatively new concept – there aren’t currently any operational superfunds, although market entrants are actively seeking business.
  • The entity running the superfund will be aiming to make a profit and distribute returns to external investors.  The expectation is that this can be achieved through cost efficiencies, better access to investment opportunities and the pooling of risk.
  • They will be regulated by the Pensions Regulator (although the authorisation framework is not yet in place) and the intention is that they will be eligible for the PPF.

What are the advantages for employers?

  • A key advantage would be severing the link between the employer and the historic pension scheme.  Following a transfer to a superfund it is expected that there would be no further recourse to the employer.
  • The cost is likely to be substantially lower than the cost of securing the pension scheme’s liabilities with an insurance company.

What are the risks?

  • This is a new and untested solution for managing pension scheme liabilities.  Employer support is replaced with a finite capital underpin, provided partly by the premium paid on transfer and partly from the capital invested by external investors.
  • There will be Pensions Regulator scrutiny.  Employers will be expected to seek voluntary clearance from the Regulator before a transfer to a superfund takes place.
  • The pension scheme’s trustees will need to be convinced that it is in members’ interests to give up ongoing employer support in exchange for transferring to a superfund.  For stronger employers, this may prove difficult.