Could superfunds become the vehicle of choice for PPF+ schemes?

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

As Covid-19 is expected to leave more defined benefit schemes stranded, should those that are too well funded to enter the PPF but not well enough to buy out be able to consolidate into a superfund? 
It has taken years to get if not to a regime, at least to an interim regime for superfunds, but the signs are that there could indeed be some transfers into superfunds in the not too distant future. 

Covid-19 accelerates need to consider superfund role for PPF+ 

With more companies struggling to keep afloat amid a Covid-induced reduction in demand and operability, the number of defined benefit schemes looking to sever ties with the employer and secure member benefits could increase, just as sponsors’ ability to provide extra cash diminishes.  
The Pension Protection Fund expects a surge in schemes entering assessment; a number of these will come out of this process as so-called PPF+ cases, where benefits are often cut so that they can be secured with an insurer. Trustees are now keen to know if superfunds could be an alternative to insurance in such cases – potentially for a higher level of benefits for members. 
Ian Clarke, an employer-nominated trustee at the Yell Pension Plan, said his scheme, which had been aiming for buyout, is in surplus over technical provisions but currently has a considerable shortfall on a buyout basis.  
“With the gap getting so big... we are now thinking can we get into a superfund,” he said, particularly as the future of Yell, publisher of the Yellow Pages, has been affected by the Covid-19 crisis and is unclear. A superfund “may not be as strong as an insurance company but it’s something we’ve got to look at”, he said. 
However, there are questions over the absence of a specific legal framework for superfunds, which have recently been given an interim regime by the regulator, and Clarke said that he would welcome it if parliament was to speed up legislation for these vehicles. Their advent would not only provide a new option for schemes but, he hopes, would also drive competition and force insurers to revise their prices. With just a handful of buyout providers in the market, currently “they can cherry pick” their clients, he noted. 
Clarification over whether superfunds would be a possibility in PPF+ cases would also be welcome, said Clarke.

Could recent judgments drive PPF+ schemes to superfunds? 

Unsurprisingly, this view is shared by superfunds themselves, especially as Covid-19 means PPF+ could become an important source of clients and could help superfunds get off the ground in the initial phase. 

Richard Williams, director of policy and communications at pre-buyout consolidator Clara, said it is too early to say how much new business could come from PPF+ schemes, but noted that “given the current economic outlook we expect both trustee interest in Clara and PPF+ cases to grow”. 
For Williams, superfunds are ideally placed to take on PPF+ cases given that affected members normally take a haircut on benefits. 
“The benefits of consolidation are clearly shown when a consolidator like Clara could provide full benefits to members of a PPF+ scheme, rather than otherwise reduced benefits. While this is complex, it is legally possible now,” he opined. 
However, the law is less clear about whether superfunds could provide less than full benefits to PPF+ scheme members, he added, and “the uncertainty around PPF compensation levels and the present legal hurdles will require further work and thought before such transactions might be possible”. 
The situation is complicated by two recent European Court of Justice cases around lifeboat compensation levels; in the Hampshire judgment, the court ruled that any haircut applied by the PPF must not reduce benefits to less than 50% of the original entitlement, while the Bauer judgment means that members must be above the threshold income for poverty as defined by Eurostat – something which is difficult to apply without knowledge of a member’s overall financial situation. 
In PPF+ cases, members must not receive less than what they would have got from the PPF, but “recent and ongoing court cases about PPF compensation levels make that minimum level unclear”, said Williams. “Given this uncertainty, we’re not sure an insurer or a consolidator could, at this time, offer less than full benefits.” 
If this view is shared by the Pensions Regulator and the PPF, it could be a boon for superfunds as the cost of securing full benefits with an insurer would in effect price PPF+ schemes out of the buyout market. 
A TPR spokesperson said: “Superfunds have the potential to offer improved benefits for pension savers. We introduced stringent standards and a robust regulatory framework in our June 2020 guidance. Trustees should speak to TPR and the PPF at the earliest opportunity when considering transferring to a superfund. This includes schemes in PPF assessment.” 
A PPF spokesperson said: “We don’t yet know enough about the superfund model to comment on whether it might be an option for trustees to consider in a PPF+ situation.” 

Would superfunds be a good alternative for PPF+ schemes? 

Ian Clarke
Richard Williams