30 November 2021
The announcement today (30th Nov) that Clara Pensions has been given the go-ahead by the Pensions Regulator marks a milestone in UK pension provision according to consultants LCP. Pension scheme trustees and corporate sponsors will now have a significant new option as they plan the future of their Defined Benefit (DB) pension scheme in what is expected to become a multi-billion pound market in the coming years.
Under current rules, DB pension schemes are expected to have a long-term objective which usually involves ultimately buying out all of their liabilities with an insurance company. But many schemes are not at a funding level where this is a viable option in the short to medium term. This means that the pension scheme with its associated costs and uncertainties will remain on the company’s balance sheet for years to come.
This new option allows pension trustees to transfer the pension scheme – and all its assets and liabilities – to a new Superfund which takes over responsibility for paying the pensions due to members. The cost of the transfer is expected to be lower than buyout. In some cases, the current sponsor will make an additional cash injection to help make the transaction viable.
There are two main Superfund models:
- The ‘bridge to buyout’ which is the model proposed by Clara; under this route, Clara will consolidate DB pension schemes alongside a “capital buffer” provided by Clara’s investors and target a more efficient and cost-effective route to buyout than the individual schemes could achieve on their own;
- The ongoing pension scheme model, which is proposed by the PSF; under this route, the PSF will consolidate DB pension schemes alongside a “capital buffer” provided by the PSF’s investors and target an investment strategy that allows them to pay pensions on an ongoing basis (rather than explicitly target buyout);
The approval of Clara may also pave the way for other approaches which involve alternative models for bringing third party capital into DB pension scheme funding (some of which are already marketing themselves). As a result, schemes will have a menu of options going forward, ranging from full buyout to a transfer to a Superfund or other approaches which obtain third-party capital support for the scheme, or on-going run-off until all benefits have been paid. Not all solutions will be appropriate for all schemes, and schemes will not be allowed to transfer to a Superfund if buyout in the short to medium term is a realistic possibility. But there may be a funding ‘sweet spot’ where the Superfund model is attractive, especially where employers would be willing to make a one-off additional payment to move the pension scheme off their books and into a Superfund.
Commenting, LCP head of corporate consulting Gordon Watchorn said:
“This is a red letter day for pension schemes and the firms who sponsor them. After years of discussion and understandable caution from regulators, we should now see Superfunds up and running and doing transactions in the coming months. Where a scheme is unlikely to reach buyout funding levels in the near future, moving to a Superfund offers a potential win-win for members and employers. The member benefits from being part of a larger scheme with a potentially increased chance of pensions being paid in full, whilst the employer gets the opportunity to settle their pension bills once-and-for all. There will clearly need to be careful ongoing regulation of Superfunds to make sure they live up to their potential, but today’s announcement by the Pensions Regulator marks a major step forward in the world of pensions”.