In a significant step for the pensions de-risking market, the Pensions Regulator has published guidance for DB consolidators (referred to in the guidance as “superfunds”) on the regulatory regime that will apply to them until a longer-term regulatory framework is put in place by the Government. The Regulator has also published guidance for trustees and sponsors who are considering a transfer to a DB consolidator.

Publication of the interim regulatory regime and the accompanying guidance means that it is now possible for the existing consolidator vehicles and new entrants to the market to submit their business plans and models to the Regulator for approval. It also opens the door for DB sponsors and trustees to transfer their scheme to a consolidator where trustees consider that this will enhance the security of members’ benefits and is in their best interests.

What is DB consolidation?

The consolidation of defined benefit (DB) pension schemes can take several forms. In this context, consolidation involves the transfer of the assets and liabilities of a DB scheme to a new scheme within a consolidator vehicle usually requiring a payment to be made by the scheme’s sponsoring employer. The effect of the transfer is that the sponsor is relieved of its ongoing liability to fund the scheme’s liabilities and this obligation is replaced by an employer entity within the consolidator structure, backed by a capital buffer (generally created by investor capital and the contribution from the ceding employer).

Once a scheme’s assets and liabilities have transferred to the pension scheme within the consolidator, that scheme will take on the obligation to pay members’ benefits as they fall due. Ultimately, the consolidator may seek to secure those benefits with an insurer (in the near or longer term) or it may choose to run the scheme on indefinitely.

Interim regulatory regime

Ahead of the introduction of a permanent authorisation and supervision framework for DB consolidators, the Pensions Regulator has set out the details of the interim regime that will apply until the necessary legislation is introduced. The guidance builds on the DWP’s consultation on the regulation of “superfunds” which was launched in December 2018 and to which a response is still awaited. It applies to all superfunds, except models involving the use of special purpose vehicles put in place before the publication date 18 June 2020.

Although the interim regime is not underpinned by legislation, the Regulator will seek to supervise DB consolidators through the use of its existing statutory powers (such as its powers to appoint and remove trustees and to set a scheme’s funding arrangements where suitable arrangements are not in place). The Regulator also expects employers to seek clearance before they transfer their scheme to a consolidator vehicle. In addition, trustees are highly unlikely to agree to transfer their scheme’s assets and liabilities to a vehicle that has not been “approved” (albeit on a non-statutory basis) by the Regulator. In these ways, the Regulator hopes that it will be able to effectively control the consolidator models that emerge, supervise how consolidators operate and police the transactions that take place.

Key features
1. Initial assessment and ongoing supervision

Before a new consolidator is launched, the Regulator expects those that want to establish it to submit the business model for an initial assessment. In this initial assessment, the founders will be required (amongst other things) to:

  • explain to the Regulator how their model meets the expectations in the guidance
  • demonstrate that their vehicle is financially sustainable and will meet the capital adequacy requirements (see below)
  • demonstrate that it will be run by fit and proper persons
  • demonstrate that they will have suitable systems, processes and governance arrangements in place
  • provide evidence confirming the scheme is registered with HMRC, and
  • provide an explanation as to why they consider the scheme is PPF eligible.

Once a consolidator has passed this initial assessment, the Regulator will require information to be provided on an ongoing basis as part of a regular reporting regime.

2. Clearance

Ceding employers are expected to apply for clearance in relation to a transfer of their scheme to a consolidator, as this type of transaction will be treated as a new category of Type A event. As part of the application, the Regulator expects to see:

  • evidence of the ceding trustees’ due diligence, and
  • evidence that the superfund has provided the ceding employer and trustees with full and transparent details of their offering, their associated fees, their funding and investment objectives, and their methods for achieving their objectives.

The Regulator will also need to be satisfied that:

  • the transfer is in the best interests of the members of the relevant scheme
  • the trustees have explored all of the alternative options available to fund the scheme and in particular, whether there is a reasonable prospect of being able to secure members’ benefits through a buy-out with an insurer in the foreseeable future, and
  • the additional security provided by the transfer (in the form of the capital injection by the ceding employer and the capital buffer provided by the consolidator) is sufficient to mitigate the loss of the employer covenant.
3. Regulatory gateway

The Regulator has included a “regulatory gateway” (which was proposed as part of the DWP’s consultation) in its interim regime. In particular, the Regulator does not expect a consolidator to accept a transfer from a ceding scheme that has the ability to buy-out or is on course to do so within the next 5 years. Clearance is also very unlikely to be granted in these circumstances.

All eyes will be on how this gateway operates in practice, as several questions were raised about this in response to the DWP’s consultation, including:

  • How will the Regulator determine whether a scheme may be on course to buy-out within 5 years?
  • How likely does this need to be?
  • What happens if a scheme cannot in fact buy-out within that period?
4. Financial sustainability

In assessing the financial sustainability of a consolidator, the Regulator will need to be satisfied that:

  • the consolidator has a robust business plan, and a strategy for how it will deal with an intervention trigger or wind-up of the scheme
  • the consolidator has detailed and costed plans for winding up, which cater for all the likely scenarios, including the pension scheme being transferred to another consolidator and benefits being bought out with an insurer
  • the corporate entity has access to sufficient financial resources to cover the costs involved in set-up and running, any costs it may incur in respect of the consolidator, and any expected capital expenditure requirements, as well as sufficient financial reserves to continue to pay the costs it may incur following an intervention trigger or the wind-up trigger, and
  • the corporate entity’s financial reserves are ring-fenced, and a proportion of the financial reserves are held in cash or near cash, to address any short-term liquidity issues in the event of failure.

The Regulator will be seeking to understand the long term objectives of the consolidator, the consolidator’s key commercial goals and implications if these are and are not met, cash flow expectations, how and when the consolidator will receive income, the corporate structure of the vehicle and any debt and equity financing arrangements.

5. Capital adequacy

The capital adequacy requirements that will apply to consolidators are probably the most critical (and also the most controversial) element of the new regulatory regime.

In its interim regime the Regulator has stopped short of requiring consolidators to mirror the capital adequacy requirements that apply to buy-out insurers. Instead, the Regulator has said that a consolidator will be required to hold sufficient funds to ensure that (based on the relevant modelling) the probability of members’ benefits being paid in full is at least 99%. A section in a segregated superfund that wishes to receive a transfer in from another scheme must be funded to at least this level. A non-segregated superfund must also be funded to at least this level in order to accept a new transfer. In addition, all transfers to a pension scheme must meet the capital requirements on a ‘standalone’ basis.

To achieve a sufficient level of member protection, consolidators will need to meet a range of requirements relating to:

  • the scheme’s technical provisions – these must be calculated in line with benchmark assumptions set out in the guidance, unless alternative assumptions, which do not materially impact on the level of the scheme’s technical provisions, can be justified. The benchmark assumptions include a benchmark discount rate (of gilts +0.5%) and approaches to setting assumptions regarding inflation, mortality, commutation, demographic assumptions, expenses and the scheme’s PPF levy.
  • size of capital buffer – the amount that is required to be held in a consolidator’s capital buffer will be risk-based and therefore this will vary depending on the particular circumstances. For example, a higher risk investment strategy would require a larger capital buffer. The assessment of risk must take account of market risks (including inflation) and longevity.
  • two legally enforceable intervention triggers – consolidators will be required to include the following triggers (as a minimum) in their legal arrangements:
    • low risk funding trigger – if the value of the scheme’s assets plus those held in the capital buffer are equal to or less than 100% of the level of the Regulator’s minimum technical provisions, the assets held in the buffer would have to be transferred into the scheme and would come under the control of the trustees.
    • wind-up trigger – this will be set at 105% of the scheme’s section 179 funding level, unless otherwise agreed by the Regulator (in consultation with the PPF) in exceptional circumstances. Where this trigger is met the scheme will need to be wound-up and members transferred to a new arrangement.
  • extraction of value restrictions will apply to the extraction of profit from the vehicle (albeit that these will be reviewed within three years of this interim regime being introduced). In particular, no funds can be extracted from the capital buffer or pension scheme until members’ benefits have been bought out in full with an insurer. This is to ensure an alignment of interest between the investors and the scheme’s members. Surplus value in the scheme or capital buffer should also not be used as capital to support new transfers into a superfund. All transfers into a superfund should be able to meet the capital adequacy test on a ‘standalone’ basis.
    Restrictions will also apply to the fees, costs and charges that may be levied by a consolidator on the scheme. For example, fees relating to the provision of services should be set in line with market levels.
  • investments – the guidance sets out eight principles that consolidators will be expected to comply with in relation to their investment strategy and the investment of assets within the scheme and the capital buffer. These principles recognise the fact that:
    • The capital buffer is a proxy for the employer covenant, and while not an asset of the pension scheme, it forms part of the longer-term security for members, which can be called upon when needed. It is, therefore, essential that the assets in the capital buffer are invested in a manner appropriate for the scheme because the capital buffer may be called upon (and the buffer assets may need to transfer to the scheme) to provide support for the pension scheme.
    • During the interim period as different models emerge, there is a risk that some models may not get market support, may not achieve critical scale, may fail or may decide to exit the market. In that event, the investments held by the pension scheme and the capital buffer need to be appropriate (including being realisable and transferable for full value) to enable 100% of members’ benefits to be protected to a high degree of certainty.

The principles are designed to help ensure that all the assets held are invested appropriately for the liabilities, concentration risks are limited, the assets held are transferable and investments accepted as part of any transferring scheme transfer are consistent with investments that the trustees would ordinarily hold.

Guidance for trustees and sponsors

As well as setting out the details of the interim regulatory regime, the Regulator has also published guidance for trustees and sponsors that are considering transferring their scheme to a consolidator. This guidance makes clear that the Regulator will closely scrutinise the rationale behind any such transfer, the impact on the security of members’ benefits and the availability of other options.

Sponsors are reminded of the expectation that they will seek clearance from the Regulator before a transaction takes place. The guidance also highlights the need for them to provide all the resources and information to the trustees that they need to decide whether or not to proceed and calls on sponsors to cover the cost of any professional advice that the trustees need to obtain.


This is a significant development in the context of pensions de-risking. The idea of DB consolidation has been talked about for some time. However, the uncertainty surrounding this and the delay in implementing a regulatory regime for consolidators has prevented any transactions from taking place to date.

Whilst the guidance (like the DWP’s consultation before it) recognises that buying out members’ benefits remains the gold-standard, the introduction of a regulatory regime for consolidators means that DB consolidation is now a genuine option for many schemes to consider either in the short term or as a long-term destination for their members.

The timing of this is significant as the Pensions Regulator is urging trustees and sponsors to agree a long-term objective for their scheme. Trustees and sponsors may also be forced to review their long-term strategy in light of the impact of Covid-19 on their scheme and the sponsor’s business.

Having said that, the momentum that the publication of the interim regulatory regime may have given to consolidators, has been undermined somewhat by  reports that Bank of England Governor, Andrew Bailey, has written to the Secretary of State for Work and Pension, Therese Coffey, warning that DB consolidators pose a risk to financial stability. His warning stems from the fact that (under the interim regulatory regime at least) consolidators will not be subject to the same capital adequacy requirements as buy-out insurers.

It is too early to tell precisely what impact Andrew Bailey’s dramatic intervention will have on this emerging market but it may make some trustees, in particular, more nervous about transacting. It will also cause some embarrassment for the Regulator and the DWP. Barring a dramatic U-turn, it is probably too late to put the genie back into the bottle but it will be key to see how they respond.

Rachel Pinto
Rachel Pinto
Partner, Pensions, London
+44 20 7466 2638
Tim Smith
Tim Smith
Professional Support Lawyer, London
+44 20 7466 2542









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