The Pension Superfund, a consolidator of defined benefit (DB) schemes currently being created, won’t guarantee annual bonuses to its members in case of a surplus, it has said.
Instead it will be up to the trustees of the new fund to decide how these assets are used – either to hold as reserve or to pay as a bonus to members.
Luke Webster, head of asset liability management at the Superfund, told FTAdviser any improvement in the scheme’s funding level will be divided each year between a special buffer, which will receive two thirds of the surplus, and the member trust, which will get the other third.
It is "entirely under trustee discretion" how these funds will be applied, he said.
The Pension Superfund is due to launch in the coming months.
By year seven, the member trust is expected to have built up assets – assuming no distributions have previously been paid to members – equal to one year worth of benefit pay-outs.
The consolidator is headed by Alan Rubenstein, who was until January this year chief executive of the Pension Protection Fund (PPF).
He teamed up with City financier Edi Truell's Disruptive Capital and private equity investor Warburg Pincus to launch the new scheme, which will accept bulk transfers from DB plans and consolidate them into one occupational pension scheme. It has already lined up an initial £500m of capital.
Mr Rubenstein told FTAdviser in April The Pension Superfund will only accept fully funded pension schemes to guarantee it is "sufficiently strong to offer a high level of security".
For pension funds that are in a funding deficit, employers can pay the difference to the get the funding of their scheme to 105 per cent on the superfund basis.
The investors’ money will be used to bring the scheme entrants' funding levels to 115 per cent, the 10 per cent surplus being allocated to the special buffer.
If at the end of the year, when allocating the fund surplus to the buffer and to the members' trust – surplus being anything above the 100 per cent funding level – the Superfund level is still above 115 per cent, the investors will get a return.
However, the Superfund’s financiers won’t be called to fund any potential deficit of the consolidator.
Mr Webster explained in the case of a shortfall, the scheme is entitled to access the special buffer to raise the funding level back to 100 per cent.
The announcement of the creation of the superfund followed the government’s publication of its DB white paper, where it revealed plans to promote consolidation in the DB pension market, in which two thirds of the 5,600 schemes are deemed to have funding shortfalls.
According to Gareth Strange, lead of OneDB - a management service for final salary plans - at Willis Towers Watson, the "creation of a structure where member benefits can be enhanced will spike the interest of both corporate sponsors and trustees".