Superfunds transfers will increasingly become a popular ‘plan B’ option for DB schemes with weak sponsors, according to leading pension law firms.
In a survey of 11 of the biggest pension law firms Willis Towers Watson found that lawyers want trustees to dedicate time to considering this option as an alternative to the Pension Protection Fund (PPF) or an insurer led buy-out.
This view comes after reported trustee concerns about increased sponsor covenant issues resulting from the Covid pandemic and weaker economic outlook. WTW said that all the legal funds surveyed believed superfunds should have a big role to play in those contingency plans, if and when they receive approval from The Pensions Regulator (TPR).
Willis Towers Watson head of pension risk transfer Ian Aley says, “Whilst the PPF is a highly-valued safety net, when we show trustee boards the impact at an individual member level in the event of entering the PPF, many trustees are surprised at the haircut to benefits different members may receive.
“This is because trustees typically consider funding on an aggregate basis and even for schemes that have a headline funding position of over 100 per cent funded on a PPF basis, the average pension benefits in value terms for someone aged between say, 50-55, can sometimes be as low as 60-70 per cent of full benefits — much lower than some trustees might have imagined.”
He adds that after several years of scrutiny, the industry may finally have a strong contender as an alternative to a PPF plus buyout, which could deliver materially improved outcomes for members.
However the survey showed legal experts were split on whether schemes with insolvent sponsors should jump straight into running themselves as a Scheme Without a Substantive Sponsor (SWOSS) if they believe that to be the best course of action, or whether they should enter into assessment by the PPF first before making a decision.
Four experts thought that trustees should be able to establish a SWOSS mechanism straight away, two believed they should enter PPF assessment first and nearly half (five) were unsure.
For schemes where employer insolvency was not expected but could not be ruled out, most of the legal experts (nine) thought that schemes would benefit from consulting with tPR first, before making any firm contingency plans, with most citing TPR’s experience in this area as being beneficial.
Aley adds: “It’s clear that where there is increased uncertainty over sponsor security, contingency planning for financial shocks is as important as ever for pension schemes. If it became necessary to act then mobilising quickly and effectively can have real benefits for the long term security of the scheme and its members.”