10 July 2020
Following the Regulator’s announcement last month (see here), we finally have clear guidance on how high the bar will be set for superfunds (also known as DB consolidators) to operate. Does this remove the final barrier to allow these vehicles to get off the ground? Not quite. However it is clearly a significant (and much-anticipated) milestone, which should finally mean the industry gets to see whether superfunds can deliver on their long-touted promise to shake up the strategic options available for the trustees and sponsors of UK pension schemes. In my role on the independent DB consolidators team at LCP, where we have been researching the developing superfund market over the last two years, it does finally feel that we are on the home stretch to seeing the first successful superfund transactions.
So what comes next?
The two superfunds currently in the market, Clara Pensions and the Pension SuperFund, have both expressed cautious optimism about the new regulatory framework. We understand both are moving to the next stage with the Regulator - seeking approval to operate - without any substantive changes to their business models. In terms of what comes next:
- Approval of the two superfund models: Both superfunds are hoping to be granted approval by the Regulator shortly to operate. It is anticipated that this process could be relatively swift, with approvals potentially granted before the Autumn.
- Inaugural transactions to be taken to the Regulator: Once the consolidators have been granted approval, we expect their first transactions to be taken to the Regulator for consideration. The new guidance is consistent with previous statements; all superfund transactions need to be reviewed by the Regulator through the “Clearance” framework. We anticipate that these first transactions will be relatively clear cut decisions for the Regulator. Our handy guide, as found here, includes a page setting out the types of schemes for which the case to move to a superfund is likely to be strongest (see page 4).
- Paving a smoother path for schemes looking to transfer: We understand the Regulator is hard at work preparing an update to its previous Trustee guidance (alongside other documents). It is thought that this update will streamline the governance burden for schemes looking to assess whether a superfund is appropriate for them, and therefore reduce a further barrier for entry, particularly for smaller schemes (where the due diligence costs of deciding whether to enter a superfund could be prohibitive).
In the current market, and particularly as the full economic impact of Covid-19 starts to be seen, innovative solutions like superfunds should prove an invaluable addition to the suite of “end game” options available for UK pension schemes. However this next stage in their lifecycle is crucial; the progress we see in the next 3 to 6 months feels vital for the long-term viability of superfunds in the UK.
Is this the key to unlocking other innovative solutions?
Now the bar has been set and whilst the two current superfund models are working to get approval and their first deals across the line, there are various other innovative solutions being developed across the pensions market. One common thread of these solutions is their ability to attract external capital to improve the robustness of a scheme’s financial position, with some expected to keep the sponsor connected to the scheme (an “on balance sheet” solution). Another theme is that these solutions are not going to be appropriate for all schemes - the specifics of the case should drive the decision on whether one (or any) of these solutions is likely to be appropriate.
A look ahead
Although it is difficult to know what the pensions landscape will look like in even a few months’ time, I will confidently predict that we will continue to see new and innovative solutions being announced in the market… and some schemes will continue to push the envelope on developing bespoke solutions to help mitigate their specific risks. Superfunds will not be appropriate for all schemes – and in many cases they can be quickly ruled out – but one action I would recommend all schemes take away following the guidance being published is to consider whether a superfund could play a role in their journey plan… in the knowledge that these solutions may just be the tip of the iceberg of the innovation we may see in the next 12 months.