Protecting savers and supporting innovation are central to our work. In line with this, we are working closely with providers in the market to explore alternative defined benefit (DB) scheme funding arrangements that are emerging.
One area where we are seeing significant activity is around capital backed journey plans (CBJPs), also known as capital backed arrangements. Arrangements such as CBJPs vary significantly in nature. In general, they involve a third party providing additional capital to support the risks in the scheme with the scheme’s assets being invested in a higher expected return portfolio. This is done on terms agreed between the trustees and the third-party funder.
More recently we are seeing CBJPs considered when a sponsoring employer is financially distressed including the imminent insolvency of the employer. The Pension Protection Fund (PPF) would normally be the safety net for members in those schemes. However, if a CBJP can help members get benefits above PPF levels on appropriate terms then clearly that would have our support. But we would need to scrutinise the CBJP to make sure that it was appropriately set up and being run well.
We have set out in our DB superfund guidance that where CBJPs are considered in these types of circumstances, elements of our superfund guidance would be applicable. We expect to assess CBJP proposals against the guidance. We have retained flexibility to enable us to ‘turn on or off’ various aspects of our guidance and expectations to suit the circumstances of each CBJP.
We want to support innovation in savers’ interests and think that CBJPs may be a good option for some schemes when customised to their specific circumstances. We are keen to continue to engage with the market on these arrangements and to see them develop alongside other options that offer trustees greater choice without compromising on the security of members’ benefits.
CBJPs won’t work for everyone but we are having discussions with a number of schemes and providers in this area. So far, we have not completed any CBJP assessments. We would generally expect to confirm publicly where a particular CBJP proposal has been assessed as meeting the relevant expectations from the superfund guidance.
What trustees should consider
In the new year, we plan to publish new guidance to help trustees (and employers) navigate alternative arrangements and highlight factors that may be relevant to trustees’ consideration of these offerings. Ultimately, we expect schemes to have trustee boards with independent decision-making authority on the way their schemes are run, including investment strategies. For now, there are some issues we expect trustees to consider:
- Proactively engage as early as possible with the employer and TPR, and PPF if applicable. Depending on the complexity of the arrangements our assessment will take two to six months.
- Any additional investment risk taken needs to be balanced against the level of capital put in place and the trustee should have ultimate say over the appropriate level of risk taken.
- Trustee boards need to have sufficient collective knowledge and skill to navigate the pros and cons facing the scheme as a result of the arrangement and not be conflicted in the proposed arrangements. They should consult their advisers where appropriate.
We are committed to enabling innovation in the DB space. We can see a useful role for CBJPs in this market where they have saver protection as their focus. You can expect to hear more from us on this and other innovations in the new year. In the meantime, our message to trustees is simple: engage with us at the earliest opportunity if you are considering a CBJP to ensure you are meeting our expectations to protect savers.
By Mike Birch
Director of Supervision