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Survey Report

The increasing role of alternative risk transfer offerings

De-risking report 2025

By Ryan McKenna | January 27, 2025

In this article, Ryan McKenna provides a summary of developments over 2024 which have led to a potential broadening of the role of superfunds and other providers.
Retirement
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The risk transfer market continues to develop at pace, but this isn’t just new insurers entering the market, we are also seeing continued innovation in ‘alternative’ risk transfer offerings. In turn the Pensions Regulator has provided guidance, potentially giving trustees and sponsors more confidence to explore these options when the time is right.

Background to the increasing role of alternative risk transfer offerings

Lots of schemes are now fully funded on a buyout basis – their decision is then typically whether to run on or buyout immediately, though even on buyout there remains new options to explore, such as the M&G captive reinsurance product mentioned below.

For those not fully funded on buyout, we are finding more trustees and sponsors wanting to know what other options are available to their schemes. Some of these schemes may have a genuine interest in doing something now, whereas others want to understand the options that might be available in the future, say, if the sponsor should get into financial difficulty.

There’s also increasing recognition of the role alternative offerings have to play from the wider pensions industry, including from the Pensions Regulator, and interest from some trustees and sponsors, for example:

  • The Pensions Regulator’s guidance to trustees considering a superfund transaction also touches on what the Regulator expects of alternative Capital-Backed Arrangements (CBAs) depending on their specific features
  • The actuarial profession’s Technical Actuarial Standards requires actuaries to consider the different alternatives for securing members’ benefits when advising on bulk transfers (including buyouts)

While to date there has only been one announced Capital-Backed Arrangement transaction (in May 2020) and three superfund transactions, 2025 might be the year that this market starts to see a significant uptick in deals.

Capital-Backed Arrangements

What is a Capital-Backed Arrangement, and when might they be used?

CBAs involve a third-party providing capital to support a scheme to achieve a particular goal (say, buyout) in a particular time frame (say, in 10 years).

The capital is intended to support the scheme taking more risk with its investments than it might be comfortable doing based on its sponsor covenant alone, so helping it to achieve the agreed goal while also providing a return to the third party on the capital it has provided.

These transactions are typically considered by schemes with a buyout funding level of less than 85% as, above this level, they would likely instead be able to immediately enter a superfund or buyout.

They may also be of interest for those schemes where the sponsor is struggling and a CBA can be used to create a sponsor of last resort (referred to as a special purpose vehicle employer, or SPV employer for short, in the Pensions Regulator’s trustee superfund guidance). Then, in the event of the failure of the original sponsor, this SPV employer would step in and prevent the scheme entering into Pension Protection Fund (PPF) assessment, thereby potentially allowing the trustees to continue to run on the pension scheme and pay unreduced benefits, if they believed this would likely be beneficial to members.

So where are all the CBA transactions?

From our experience of working with trustees and sponsors considering CBA transactions, the challenges to transacting such a deal are three-fold.

  • First, the trustees and sponsors must get comfortable with the asset allocation required under the CBA. To hit the agreed goal (say buyout) and provide a return on the capital for the capital provider often requires targeting returns (and therefore taking investment risk) above what a pension scheme normally would (albeit supported by the backing capital).
  • Secondly, these products remain largely untested. This applies both to the contracts that govern them but also to their operational support, which will be very important to trustees considering any such transaction. As such, trustees need to undertake significant due diligence to satisfy themselves they are happy to enter into such a deal.
  • Thirdly, trustees typically have a long to-do list at any given time – guaranteed minimum pension (GMP) equalisation, dashboard readiness, etc.

However, with the potential for additional capital to protect down-side scenarios and help achieve schemes’ endgames more quickly, there could be real benefits for these solutions for the right schemes.

Clara innovation

As an established superfund, assessed by the Pensions Regulator, Clara is well positioned to expand out their offering from simply just “traditional” superfund transactions, and has been promoting two new propositions.

Bridge to Clara

Clara has now launched its own CBA, known as “Bridge to Clara”, that supports schemes with a buyout funding level of between 70% and 85%. The proposition operates in the same way as any other CBA, other than once the scheme is well funded enough it will enter into the Clara Superfund (at which point it would come off the sponsor’s balance sheet), from where it would then be targeting buyout with an insurer.

This offering from Clara has the potential to start to address the possible trustee concern highlighted above that many CBAs are untested - Clara is an established superfund, assessed by the Pensions Regulator and with all the operational requirements in place that this entails, so potentially a more attractive counterparty than may otherwise be the case.

Connected covenant

Under Clara’s new “Connected Covenant” proposition, unlike a “traditional” superfund transaction, the link to the sponsor remains in the form of a guarantee to the section in the Clara Pension Trust into which the liabilities have been transferred. If this section gets into funding difficulty it would first draw on the financial support provided by Clara, but, if necessary, the sponsor would be called on to provide contributions.

We understand that auditors may accept that under this offering, pension liabilities can come off the sponsor’s balance sheet (possibly with a note added in the accounts to explain the position) – something that may be very appealing to some companies.

From the trustees’ perspective, they benefit not only from the Clara capital and established operational set up, but they also retain the link to the sponsor covenant until buyout is secured. This is expected to make it much easier for the trustee to agree to such a transaction and for any such deal to pass the Pensions Regulator’s Gateway Test that the likelihood of members’ receiving full benefits is improved by transferring to a superfund.

Innovation with traditional insurers

Finally, bulk annuity insurers continue to look for new ways to meet the needs of pension schemes and their sponsors. For example, M&G have recently announced their first “value share” bulk annuity. From a trustee perspective, at the ‘front end’ there is no difference with this to a normal bulk annuity in terms of features and security (other than having to transact with M&G, rather than having free choice of insurer).

However, at the ‘back end’, M&G pass out some of the risk associated with the transaction to a specially created insurance captive cell in Guernsey. This cell is capitalised by the scheme’s sponsor, with a view then to making a return on this investment (in a not dissimilar way to what a life insurer would expect when writing a bulk annuity).

Similar structures have been used for decades by corporates to manage risks associated with their businesses, typically property and casualty risk but also including pension risk. However, to date this has typically been the domain of large corporates with the necessary scale and appetite to make such an arrangement work.

What the M&G structure now offers is a way for any sponsor with a sufficiently large scheme (say in excess of £1bn) to recreate many of the benefits of such a structure without the associated costs and drains on management time of running their own captive reinsurer.

In particular, it provides a neat solution to those sponsors that don’t want to pay an insurer’s profit margins, while giving the trustees the comfort of a bulk annuity covering all of their scheme’s liabilities. Of course it’s not a free lunch, with the profit expected to materialise over the medium to long term, and the risk that it doesn’t materialise at all.

Conclusion

While we have seen a real uptick in client interest in alternative risk transfer solutions in 2024, this market has not yet taken off in the same way bulk annuities have – will 2025 be the year this happens?

The new government appears to remain supportive of superfunds and there is hope that legislation covering superfunds (as opposed to just the Pensions Regulator’s guidance that is in place currently) will be in place soon. This may help to encourage new entrants into the market, both superfunds and CBAs.

In turn it wouldn’t be surprising if such developments drove more trustees to consider, and in some cases transact under, these alternative solutions.

Contact


Ryan McKenna
Director
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