After a gestation period of over four years since the Department for Work and Pensions floated the idea of superfunds, the Pensions Regulator (TPR) yesterday confirmed that a first superfund, Clara Pensions, has completed TPR’s initial assessment process. This is significant as it means the first potential transactions with a defined benefit (DB) superfund can now be put forward to TPR for clearance.
This is the development for which the industry has been waiting. There is no doubt that in certain circumstances outcomes for DB members are likely to be better if those members are transferred to a superfund rather than remaining within their employer-sponsored scheme.
We expect other superfunds to enter the market too. The Pension SuperFund, which was also launched a few years ago, has not yet completed the TPR assessment process.
Should superfunds demonstrate that they can quickly build from their blueprints into fully functioning and large consolidation vehicles, this announcement may herald one of the most significant recent developments in the UK DB landscape.
Superfunds are pension funds set up by commercial entities to consolidate DB pension schemes. They are designed to meet member benefits in full, with a high probability but at a cost lower than an insurance buyout. However, they will not offer the same degree of security as an insurance buyout. Following the transfer of a pension scheme to a superfund, the original sponsoring employer has no further liability. The employer covenant is, in effect, replaced by a capital buffer that is part of the superfund.
TPR expects clearance to be sought prior to each transfer to a superfund, and as part of that it will wish to see the trustees’ due diligence on the proposed transfer.
No transaction can be put forward to TPR for clearance until a superfund completes the initial assessment process by TPR. Completion of that assessment has been taking some time, creating a niggling doubt as to whether superfunds would ever become live. This announcement firmly puts to rest any doubt.
The next superfund milestone will be the first transaction.
Superfunds will likely differ in what they offer to members.
One of the key features of Clara Pensions is its “bridge to buyout” structure. Each transferring scheme goes into its own segregated section within the Clara Pensions scheme. That section is then run for around 7-8 years until full buyout is affordable.
Therefore, Clara Pensions “creates the time” required for a pension scheme to gradually work its way to buyout rather than that journey being abruptly cut short through sponsor insolvency.
Clara Pensions, like DB superfunds generally, also offers other benefits which result in an improved journey plan for schemes, such as consolidated services across governance, operations and asset management.
The concept of a superfund is sound, but they are new. They will need to carefully execute their go-to-market strategies, gain scale – and hence economies of scale – as soon as possible, alongside convincing trustee boards that they are a safe home for their members, whilst finding investors to provide capital to fund them. If they succeed, they could potentially become the home for £ billions of UK pension liabilities.
Reasonably well-funded schemes struggling with a weaker sponsor whose future is uncertain could deliver improved member outcomes through a superfund transfer. Another example could be where a parent company with no legal obligation to the scheme is prepared to make a one-off contribution to remove liability for the scheme from the group’s books, but not one sufficient to buy out the scheme with an insurer.
There are of course lots of ways for schemes to deal with their liabilities, and it remains the case that in most circumstances, at least for the foreseeable future, most schemes will continue without transferring to a superfund.
The impact of superfunds may be felt more widely than just by the schemes with which they transact. If superfunds are successful, and that could take years to observe, some trustees may focus less on buyout as a target end game, instead becoming increasingly confident to run off on a long-term low dependency basis. They would do so in the confidence that should their sponsor ever became stressed, if they act quickly enough, they will have a viable ‘Plan B’ in the form of a transfer to a superfund.
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Separately, well-funded schemes that adopt a thorough approach to contingency planning, even those with strong employers, should consider putting in place mechanisms that help them take advantage of the new superfund regime should their sponsor ever fail.
We will send you an invitation to our webcast on superfunds at 2pm on Friday, 3 December 2021 when we will further explore this market development.
