Up to one million pension scheme members and £170bn of assets could transfer to superfunds over the next decade, PwC estimate

Oct 16, 2020

Up to one million pension scheme members could transfer to a superfund over the next 10 years, PwC has found, in anticipation of new guidance expected soon from the Pensions Regulator (TPR).

Analysis undertaken by PwC, the professional services firm, found that over the next decade about 600 of the around 5,400 defined benefit (DB) pension schemes could pass the Department for Work and Pensions’ (DWP) three ‘gateway principles’ and be sufficiently well funded to transfer to a superfund. This equates to around £170bn of pension scheme assets or about 10% of the total UK DB pension scheme universe.

Superfunds are pension scheme consolidators, structured as occupational DB pension schemes, governed by their own set of trustees and subject to UK pension legislation.

PwC believes it is likely that several billions of pension assets will transfer to superfunds during 2021 and 2022. These initial transactions will predominantly relate to pension schemes whose employers are in distress or already insolvent. In these cases, the capital buffer offered by the superfunds is expected to offer a clear improvement to the likelihood of members receiving their benefits in full. This is compared to the alternative of the pension scheme entering the Pensions Protection Fund (PPF), which typically results in reductions to member benefits over time.

But the superfund transactions are unlikely to stop there. In estimating the number of pension schemes that could pass the gateway principles, PwC analysis found that future superfund transactions may not just be limited to those pension schemes with weak employers. 

Emma Morton, PwC pensions director, said:

“As the superfunds grow in scale and build track records of performance, we expect trustees of pension schemes with stronger employers to see the benefit of transferring to a superfund.

“For schemes that have no clear way of securing members’ benefits with an insurance company, but otherwise think that’s the right strategy for them, a superfund could be the next best thing. Trustees will need to consider whether a transfer to a superfund would increase the likelihood of members receiving their full benefits.”

To transfer to a superfund, trustees will need to demonstrate that the gateway principles have been met by showing that the scheme cannot afford to buy out now and has no realistic prospect of being able to do so in the foreseeable future. The superfund must also improve the likelihood of members receiving full benefits.

Stephen Soper, PwC senior pensions adviser, added: 

“We expect the creation of superfunds to drive further innovation. An obvious alternative structure is one where a scheme transfers to a superfund but retains some employer covenant link. We also expect that some well-funded pension schemes will set up their own capital buffer in a similar way to superfunds to support a scheme run-off structure with a contingency for sponsor insolvency.” 

TPR’s guidance is arriving around 18 months after the DWP consultation on DB pension consolidation. It will be used in an interim period before a new authorisation and supervision legislative framework is put in place to cover superfund transactions. DWP is currently working to establish new legislation to govern superfunds which is expected to emerge in the current parliament.

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Richard Pain

Richard Pain

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