Modelling superfunds

We helped the Department for Work and Pensions (DWP) with its response - Consolidation of defined benefit schemes - to a 2018 consultation. The response set out that the proposed authorisation regime will assess whether a superfund:

• has a viable business model
• is financially sustainable
• is well governed
• has a high probability of being able to pay member’s benefits when required

Modelled and tested

The Government Actuary’s Department (GAD) assessed possible regulatory parameters to determine if a suitable authorisation regime might meet superfund policy objectives.

We modelled an example superfund, as at 31 December 2022, to test a range of technical provision (TP) discount rates, profit triggers and some possible investment strategies. We used these techniques to determine expected outcomes for the superfund members and investors.

Results

Modelling results suggest a TP discount rate of around gilts plus 0.75% and a profit trigger of 150% of the capital requirement for authorisation may come closest to achieving superfund policy objectives at the effective date of the calculations.

Under the modelling assumptions this provided a balance between superfund commercial viability and reasonable cost of entry against a controlled risk to members’ benefits from superfund failure.

The DWP used this analysis to support the consultation response to move forward with plans for a superfund regulatory regime. DWP will determine the suitable levels of risk and affordability required for the final regulatory framework.

GAD’s analysis

Report co-author and Deputy Government Actuary Matt Gurden said: “This was a complex and detailed analysis of the wide range of factors which can affect superfunds.

“We modelled an example superfund, in discussion with DWP. The long-term objective was for this example scheme to reach a buyout level of funding when most non-pensioners had retired.”