Partner Insight: What you need to know about the superfund TPR clearance process

Clara has now announced six transactions, giving trustees, sponsors, advisers and The Pensions Regulator (TPR) more practical experience of the clearance process. For schemes considering the route, the main questions are becoming clearer: what problem is the scheme trying to solve, what evidence does TPR need to see, and how should the parties organise the process?

Starting with the scheme's objectives

Funding is likely to be one of the first considerations. Tom Stockley says schemes need to understand their funding position, where Clara pricing may sit and whether an additional sponsor contribution could be required.

Covenant also matters, although Jonathan Repp cautions against assuming a superfund is relevant only where an employer is already in difficulty. "You absolutely don't need to have a weak covenant. You don't need to be insolvent to look at these things, but you do need to understand how strong your employer is and what that means in terms of the security for members as they stand today."

Before detailed analysis begins, Repp says trustees need to be clear about the problem they are trying to solve. "What is it you're actually trying to achieve here? What is the question you're trying to answer?" Stockley adds superfunds should now feature in endgame planning at an early stage, even before trustees have completed detailed analysis of the gateway principles.

Who drives the early work will depend on the circumstances. A sponsor making a substantial contribution may take the lead, but trustees still need to reach their own conclusion that a transfer is right for members.

Repp says one misconception is that superfund conversations need to be driven by the company: "When you look at the deals that have been done, over half of them have actually been driven by the trustees."

Stockley says the strongest processes involve both sides. "I really think it should be both sides that are driving, and that gives you the best chance to get it done."

What evidence is actually required?

DB superfunds are overseen by TPR and remain subject to ongoing supervision, while individual transfers are assessed through the clearance process. Louise Ellisdon says trustees and sponsoring employers are expected to provide evidence that a transaction meets TPR's gateway principles and that appropriate due diligence has been completed.

Clara separately needs to demonstrate that the total assets supporting each transaction, including scheme assets and buffer assets, meet the requirements of the superfund guidance on capital adequacy and investment arrangements.

Repp says the evidence requirement should not be confused with the need to produce large volumes of new material. "There's a bit of a perception in the market, or has been for a while, that you need reams and reams of evidence to support a superfund deal. I absolutely don't think that's the case. If you've gone through a good process, if you've got the right adviser, if you've asked the right questions, you can keep the evidence focused on what really makes the difference."

Stockley makes a similar point:

Ellisdon points to specific misconceptions about what TPR expects. One is that schemes must obtain a formal insurer quote to demonstrate that buyout is unaffordable. "An objective estimate from an actuary with the relevant experience of the buyout market is generally sufficient in TPR's view as evidence for that aspect of the clearance process," she says.

Another is that trustees and sponsors need to undertake extensive due diligence on every aspect of a superfund's operations, governance and management structure. In practice, TPR has already scrutinised areas such as its legal and governance framework, systems, processes and key personnel. While that does not remove the need for due diligence, it does support a more proportionate approach in areas the regulator has already examined.

Much of the evidence is likely to arise through work trustees would expect to undertake anyway. "There's very little that the regulator asks for in this process that trustees shouldn't already be thinking about," Repp says.

Working with TPR

If the early stages are about defining the problem and building the evidence, the next test is how that case stands up in front of The Pensions Regulator. For trustees, the clearance process is less about seeking permission from scratch than about demonstrating that the right questions have been asked, the right comparisons made and the right conclusion reached for members.

Early engagement with TPR is one of the clearest lessons from completed transactions. Stockley says "early engagement with the regulator is really, really important", followed by iterative engagement as the transaction develops. The aim is to ensure there are no surprises by the time the clearance application is submitted. Trustees should approach those conversations with confidence in their own evidence and due diligence, rather than expecting the regulator to direct their decision.

Repp describes TPR's role as that of a "referee, not a player". The Videndum transaction, Clara's first through its Small Schemes Offering, showed how early engagement can work in practice. "We got clearance back very, very quickly," Repp says. "It was a matter of days between when we sent the final paperwork to TPR and when we got the clearance decision back. That is testament to the work that we, and the trustees, did with TPR ahead of the clearance submission. It wasn't a surprise to them when it came in. We knew exactly what they were looking for." Only two questions followed, both on points for which the parties already had answers.

Ellisdon says Clara has reached the same conclusion across its transactions.

A more familiar process

With more Clara transactions completed, the process is becoming easier to navigate. "As more advisers, trustees and sponsors have been through the superfund transactions, the process has naturally become more efficient," Ellisdon says. "There's now a much clearer understanding of what is required, when key decisions need to be made, and how best to navigate the process."

Stockley says greater familiarity has brought more confidence on both the trustee and regulator side. There is now a clearer understanding of the evidence trustees need to provide and what TPR expects, allowing discussions to focus more quickly on the issues specific to a transaction.

Adviser familiarity has increased too, although Repp says practical experience remains uneven. "The number of advisers that have actually been through the process properly is still relatively small," he says. That makes it important for trustees to understand the experience of the individuals supporting them and whether they have navigated the process before.

Looking ahead

Ellisdon believes a permanent legislative framework should provide additional confidence to schemes considering superfunds and create a clearer environment for decision-making. "Over time that should support a more efficient process and make it easier for schemes to access these solutions as and when they're appropriate."

Stockley does not expect the underlying work for trustees to change significantly: they will still need to establish whether the transaction is the right outcome for members. Meanwhile, Repp believes the wider perception of superfunds is already shifting. "This is not niche anymore, if it ever was. You don't need some weird alignment of the stars to make a superfund deal happen."

As more providers and structures enter the market, trustees may have more options to compare. For Repp, that brings the discussion back to the question at the start: "What is the problem you're trying to solve for the trustees, for the company, and for the members? If you know that, you can make sure that the solution you go with, whether it's superfund or insurance or something else, is the right thing in the long run."