What are final salary pension ‘superfunds’?

Retirement plans: We look at the safeguards for pension savers who end up in ‘superfunds’ below

People with final salary pensions could see employers start offloading them to new ‘superfunds’ after the first scheme got the nod this week.

Regulators have approved Clara-Pensions to start taking over and managing final salary pensions, although all its future deals with employers will be probed on a case by case basis.

Employers looking to ditch their onerous final salary pension responsibilities to current and former staff can already pay insurers to take them over.

But this comes at a big upfront cost, since insurers inevitably charge a heavy premium. 

Superfunds could be a cheaper option, or simply a bridge to a full deal with an insurer.

Final salary or ‘defined benefit’ pensions provide a guaranteed income for life after retirement, and ongoing payments to bereaved spouses if you die before them.

Many have abandoned these traditionally safe and generous pensions in recent years, tempted by huge transfer value offers from employers keen to get them off their books, greater potential investment growth and inheritance advantages.

We explore the pros and cons of doing this here.

Meanwhile, nearly all private sector final salary schemes are now closed to new savers.

Eventually all of them – those that remain with employers, or move to insurers and superfunds – will wind down and reach an ‘endgame’ as the last members die.

We take a look at how superfunds will work as all this plays out, and what safeguards there will be for savers who end up in them.

How will this affect people with final salary pensions?

The first employer transfers to Clara are probably some months off, and The Pensions Regulator will investigate each deal first.

If your employer gets shot of your final salary scheme, the responsibility to pay your pension would pass to the superfund, and possibly on to an insurer after that.

Given the level of scrutiny promised by regulators, this shouldn’t make any difference to scheme members in practice.

The Government is expected to legislate on superfunds eventually. In the meantime The Pensions Regulator will assess and approve each superfund, and every scheme transfer into one, to ensure they are robust.

TPR says superfunds will have to meet criteria including good governance, being run by fit and proper people, and backing by adequate capital.

Nicola Parish, executive director of frontline regulation, says: ‘We are determined to protect savers and so potential customers of a superfund on our list can have the confidence that the scheme has been through a rigorous assessment process to show they are fit for purpose.’ 

If a superfund did collapse, the Pension Protection Fund would step in as a last resort, as it does when employers with final salary schemes go bust. 

A TPR spokesperson said: ‘We expect all superfunds to establish themselves as schemes eligible for PPF protection.

‘Like any other PPF eligible scheme they will be charged a levy. The PPF has established a specific methodology for calculating the levy due from commercial consolidators.’

What does the pension industry say?

‘Trustees of schemes have one shot when planning for a scheme’s endgame, they need to get it right and ensure scheme members are front and centre of any decision,’ says Yvonne Braun, director of long-term savings and protection at the Association of British Insurers.

‘TPR is right to expect to scrutinise every application, as the current guidance is part of an interim regulatory regime that is not prescriptive enough.

‘It reinforces the need for robust new legislation to ensure that workers have the high level of protection they expect for their pension.’

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, says: ‘TPR’s “authorisation” of Clara marks an important milestone in the formation of the superfunds market and provides fresh options for schemes and employers to secure benefits for their members.

‘Superfunds were first proposed by the PLSA-led defined benefit taskforce back in 2017, and the concept has been championed by the Minister for Pensions, Guy Opperman, for several years.’

This post first appeared on Dailymail.co.uk