Following the Chancellor’s Mansion House speech, the Government has finally issued a response to its December 2018 consultation on implementing a statutory regime for the regulation of defined benefit (DB) consolidator vehicles, known as “Superfunds”. Development of a statutory regime has been held up by debate within Government, and the pensions industry, over the nature of the regime that should apply to Superfunds. In particular, the extent to which Superfunds should be regulated like insurers and be subject to insurer-like capital adequacy requirements.

During this impasse, the Pensions Regulator has put in place an interim regime. However, only one Superfund has received authorisation under this regime to date and no transactions have yet been completed. The Government’s response may help to hasten the development of this market by confirming the Government’s support for Superfunds and by giving the green light to the implementation of a statutory regime, although no firm timetable has been set out.

Significantly, the Government has confirmed that Superfunds will not be subject to the same capital adequacy requirements as insurers. However, as expected, the response confirms that access to Superfunds will be restricted to those schemes that cannot afford to buy-out in the near future – although the precise details of this so-called “gateway test” will not be known until the legislation is published.

Key features of the proposed regime

In its response, the Government sets out its proposals for key elements of the statutory regime for the regulation of Superfunds, having taken account of the responses to its 2018 consultation. Key features of the proposed regime include:

  • Gateway test – The Government makes clear that an insured buy-out is still the gold standard for ensuring members receive their benefits in full and that it is not looking for Superfunds to be an option for schemes that can reach buyout unaided. It is also alive to the potential for regulatory arbitrage by schemes that are able to afford an insured buy-out.

To address this, the Government proposed a ‘gateway’ to regulate entry into Superfunds in its original consultation. The proposed gateway would mean that:

      • schemes that can buy-out through an insurance provider are excluded;
      • schemes that are assessed as being able to afford buy-out in the ‘foreseeable future’ are excluded;
      • a move to a Superfund would need to increase the likelihood of scheme members receiving full benefits.

The Government has confirmed the statutory regime will include a principles-based gateway along these lines. It says it will work with stakeholders, including the Pensions Regulator, to develop this policy further recognising that while the test needs to be thorough it must also operate flexibly so as not to be prohibitive to potential entrants.

On the question of what the term “forseeable future” should mean in the context of the gateway, the Government suggests five years might be an appropriate period but leaves wriggle room, saying it “feels that experience should be allowed to inform the approach and consider how best to define the term in legislation”.

  • Authorisation and supervision regime – Superfunds will be authorised and supervised by the Pensions Regulator. The authorisation regime will be based on the requirements set out in the interim regime with transitional arrangements put in place for Superfunds that have already been authorised under that regime.

Under the proposed regime, to be authorised, a Superfund will need to demonstrate that it:

      • can be effectively supervised;
      • is run by fit and proper persons;
      • has effective administration, governance and investment arrangements;
      • is financially sustainable; and
      • has contingency plans in place to protect members.

Once authorised, Superfunds will be subject to ongoing regulatory oversight. The Pensions Regulator will be given additional powers to compliment those it currently possesses to ensure it is able to effectively regulate authorised Superfunds.

  • Financial adequacy – For a Superfund to be authorised and to continue writing new business it will need to be able to demonstrate a minimum level of funding and capitalisation. Significantly, the Government is planning to base the financial requirements for Superfunds on the approach taken for occupational pension schemes, drawing limited elements of the Solvency II approach that applies to insurers, where these will prove beneficial to the Government’s policy objectives.

The Government has also decided that an estimated risk of a Superfund scheme entering the PPF of 2% would represent an acceptable level of risk for the new regime. Modelling by the Government Actuary’s Department suggests the cost of entering a Superfund running at this level of risk would be around 90% or less of the cost of an insured buy-out. The Government considers this cost would be affordable for many schemes and employers that are unlikely to be able to afford to buy-out in the foreseeable future (such as schemes with weak sponsors that are funded below a buy-out level).

Superfunds will have a set of regulatory Technical Provisions (TPs) to ensure effective provision against future financial commitments and appropriate triggers. The discount rate used to calculate the TPs will be based on a prudent assessment of the expected investment returns that might be achieved on a suitable “low risk investment strategy”. The response suggests this could be set at gilts plus 1% based on recent market conditions. The other assumptions used to calculate a Superfund’s TPs will be determined on a best estimate basis. The TPs will also include an explicit reserve for member expenses and a longevity reserve as a margin against the risk of members living longer than expected. The longevity reserve will allow for a best estimate assumption for future improvements in life expectancy broadly in line with TPR interim requirements.

  • Regulatory oversight of transactions

Ultimately, the decision to enter a Superfund will be taken by a scheme’s trustees. Before taking this decision, trustees will be required to seek an expert recommendation, or demonstrate that (particularly with smaller schemes) the cost is disproportionate. Trustees will be required to seek legal advice, including advice on possible conflicts of interest and whether they have the power to make the transfer, and be expected to obtain advice from appropriately qualified and experienced covenant, actuarial, investment and risk transfer professionals.

Trustees will be required to make a submission to the Pensions Regulator which integrates the various forms of advice received and that has informed the trustees’ conclusion that their scheme is better suited to entering a Superfund. This submission will need to document the reasoning and evidence of advisers behind the recommendations made.

At present, the Pensions Regulator expects clearance applications to be submitted in respect of all transfers to a Superfund. Under the legislative framework, the Regulator will be given the ability to define the nature of a submission for a transfer to a Superfund and allow it to take a risk-based approach to their supervision.

  • Member protection

The statutory regime will include a number of elements to ensure members’ interests are protected once a transfer to a Superfund has taken place. These include:

      • placing restrictions on the extraction of profits from a Superfund and requiring transparency on any fees and expenses being charged; and
      • putting in place prescribed funding triggers which, if breached, would lead to a Superfund being prevented from writing new business and ultimately being forced to transfer members to a different Superfund or wind-up and secure members’ benefits with an insurer.

As the schemes within a Superfund are classed as DB pension schemes, the members will also be eligible for protection from the Pension Protection Fund in the event of a Superfund insolvency.

Next steps

The new regulatory regime for Superfunds will require both primary and secondary legislation. The Government has not committed to a specific timetable for introducing the necessary legislation, saying only that it will look to bring forward legislation “as soon as parliamentary time allows”.

In the meantime, the Pension Regulator’s interim regulatory regime will continue to apply. One Superfund, Clara, has already met TPR’s interim guidance and is, therefore, able to transact. The Government is encouraging other potential Superfunds to come to market when they are ready to do so.


The Government’s response brings the prospect of an active Superfund market a step closer. However, there are still a significant number of unknowns. In particular, it is unclear when the proposed statutory regime will be introduced and if the Government will prioritise this ahead of the next General Election. It is also unclear whether a different Government would press ahead with these proposals.

Even if the Government goes full steam ahead, the legislative framework is unlikely to be in place for another 18 months to 2 years at the earliest. In the meantime, Superfunds, trustees and sponsors are left to work within the interim regime. Although no transactions have yet been completed under that regime, the fact the Government has now given its backing to the emergence of Superfunds and confirmed the direction of travel might be sufficient to break the deadlock.


If you would like to discuss any of the topics covered in this blog speak with your usual HSF adviser or contact one of our specialists.

Rachel Pinto
Rachel Pinto
Partner, Pensions, London
+44 20 7466 2638

Michael Aherne
Michael Aherne
Partner, Pensions, London
+44 20 7466 7527

Mark Howard
Mark Howard
Of Counsel, Pensions, London
+44 20 3692 9672





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