30: Pensions Regulator guidance for trustees and employers considering a transfer to a superfund

The Pensions Regulator (TPR) has issued further guidance setting out the approach TPR expects trustees and employers to take when considering transferring a DB scheme to a superfund. Following our blog last month covering the interim guidance from TPR we consider below what this new guidance means for DB schemes considering a transfer to a superfund.

Before trustees and employers enter into any transaction with a superfund TPR expects ceding employers to apply for clearance (a transfer to a superfund will be a Type A event). TPR has stated it will usually need at least three months to decide on a clearance application so early engagement is encouraged. A draft clearance application may be submitted to give an opportunity to discuss issues in advance.

In the clearance application TPR expects trustees to demonstrate why they believe the transaction is in the best interest of members and TPR will assess whether any potential detriment to the scheme through the loss of employer covenant has been adequately mitigated in reviewing the application. In addition trustees and employers must demonstrate how the transaction meets the following three ‘gateway principles’:

• A transfer to a superfund should only be considered if the scheme cannot afford to buy out now. The assessment as to whether buy out is affordable should be provided by the scheme actuary no more than one month before the date of the clearance application. Trustees do not have to obtain a buy out quote from an insurer.
• A transfer to a superfund should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer. Foreseeable future here will be specific to the employer’s circumstances but TPR expects this to be up to five years.
• A transfer to the chosen superfund must improve the likelihood of members receiving full benefits. Trustees must ensure they have sufficient information and clear and comprehensive professional advice in making their judgment.

The following are further key points from the guidance for employers and trustees:

• Cooperation: ultimately it is the trustees who will make the decision whether to transfer to a superfund. Employers should ensure trustees have all they need to make that decision, including access to senior management, financial forecasts, details of current capital structure including loans, and relevant business strategy plans. Trustees should be given adequate time to complete proper due diligence.
• Material detriment: demonstrating adequate mitigation of any detriment (due to loss of employer covenant) as a result of the transfer will be key to the application. Trustees should also consider prior potential material detriment as a result of previous corporate activity, such as mergers and acquisitions or bank refinances as well as any recent significant value extraction. Employers need to engage with this assessment.
• Advice: trustees should take appropriate and proportionate professional advice, including actuarial and covenant advice on the scheme’s position and the gateway principles. Legal advice will be needed on matters including conflicts of interest, power to make the transfer, fair treatment of members, and other legal issues such as GMP equalisation.
• Trustee knowledge: ceding trustees should assess their expertise and consider appointing an independent trustee, particularly in view of the complexity of the considerations necessary to proceed with a transaction.
• Scheme members: trustees need to be open and transparent with members throughout the process of transferring to a superfund to ensure, amongst other matters, that members do not make an irreversible decision to retire or transfer to a DC scheme which may not be in their interests at that time. Trustees should ensure members considering a transfer to a DC scheme are encouraged to take independent advice (including where not a legal requirement) and provide relevant scam and other guidance.
• Communications: information to members should be clear, accurate and jargon free and trustees should be clear that they have carried out appropriate due diligence and concluded (per gateway 3) that the transfer increases the likelihood of members receiving their benefits.

As this area evolves, more guidance and legislation will be introduced. Our pensions team is well placed to advise on this process, including due diligence, trustee duties, procedural requirements, partial transfers and any other aspects of DB scheme closures.