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Today’s regulatory regime announcement fires the starting gun on those journey plans becoming a reality. TPR guidance to Trustees has effectively given the green light to Superfunds, and in the next few months we expect to see early movers progress through the clearance process.
Today’s guidance is clear that Schemes considering this option have a complex decision to make; they will need to take appropriate advice and are required to work with the Sponsor to obtain Clearance from TPR. Applications will require careful consideration and we don’t expect the first transaction to complete for 4-6 months, nevertheless we’re aware of several schemes which are now beginning this process.
Superfunds (or financial consolidators) have been a hotly anticipated development for Defined Benefit (DB) Pension Scheme journey planning since early 2018, but until now they’ve only been an aspirational target for Trustees and Sponsors.
“ Well-run Superfunds have the potential to deliver more secure retirement incomes for workers, while allowing employers to concentrate on what they do best — running their businesses.”
GUY OPPERMAN, PENSIONS MINISTER
Regulatory state of play
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What are Superfunds?
Superfunds are a risk settlement alternative to insurance which involve a third party providing additional risk capital to replace the employer covenant of a sponsor. In principle this parallels a conventional insurance buy-out, but sits outside of the Solvency II regulatory regime, thereby permitting greater investment and reserving flexibility – driving down the cost for pension schemes and sponsors. For a pension scheme where buy-out is out of reach, a Superfund could be the next best thing.
What issues can they solve?
In simple terms, if there is a realistic prospect of buy-out in the near future, schemes and sponsor should typically rule out a transfer into a Superfund. As secure as these vehicles will need to be to meet TPR’s regulatory regime and authorisation, there’s no denying that insurance is the security gold standard.
Superfunds can, however, fill a significant gap in the market and appeal to trustees and sponsors who see the benefit of securing/settling their pension obligations but don’t anticipate having the ability to reach buy-out levels of security in a reasonable timeframe.
Schemes which feel they can no longer rely on their sponsor to get them to buy-out could use Superfunds to remove their exposure, improve member outcomes and secure full benefits. For their part, sponsors who enter into a transaction with a Superfunds are freed of the constraints of their DB pension scheme.
Why should Schemes consider Superfunds?
The decision to substitute employer covenant for the security of a Superfund can be a daunting prospect for Trustees. In determining whether it’s worthwhile to consider, we recommend asking yourself: would you agree to the reverse transaction? Would you give up a better funded, lower risk position with a known financial covenant for a worse funded, higher risk position with the potentially unlimited but uncertain and difficult to measure covenant of your existing sponsor?
The answer will depend on a number of factors, and initially Superfunds may only be appropriate for a minority of pension schemes. But any trustee or sponsor looking at long-term strategy should include this option in their assessment.
“ We have set a high bar to ensure savers can have confidence in Superfunds should their pension be transferred into one in the future.”
THE PENSIONS REGULATOR
What solutions are in the market today?
The Pension Superfund (PSF) Clara Pensions (Clara)
The Superfund market is still nascent with two providers actively in the market. The current providers, The Pension SuperFund (PSF) and Clara-Pensions (Clara), aim to undercut insurance pricing by up to 10-15% depending on the profile of the pension scheme. These two models are very different; Clara is a sectionalised bridge to buy-out model whereas PSF is a pooled run off structure.
Capitalproviders
Scheme
Sponsor
10% PSF Self-su�ciency
105% PSF Self-su�ciency
Management company
Contingent capital
Run-o� structure
PSF scheme
Non-sectionalised
Member Trust Members Trustees
Capitalproviders
Scheme
Sponsor
10% Buy-out
90% Buy-out
Management company
Capital Capital Capital Capital Capital
Section Section Section Section Section
Transition to buy-out
Clara scheme
Members Trustees
isio.com
Nick Johnson
PartnerTel: 0113 [email protected]
Rachel Bradshaw
ManagerTel: 020 7123 [email protected]
Isio
Isio’s specialist Superfund team is already in the market providing a single, joined-up approach to advising trustees and sponsors on all aspects of Superfund transactions. Working together to deliver a comprehensive picture of the options available is, in our view, the most efficient and economical way for pension schemes to consider the Superfund option against the alternatives.
If you want to find out more contact:
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. June 2020
Isio Group Limited is an Appointed Representative of KPMG LLP which is authorised and regulated by the Financial Conduct Authority FRN 210513
