Superfunds become a real option, but what happens next?

After a long and detailed process, on 30 November 2021 Clara-Pensions became the first UK superfund to achieve confirmation of successful assessment by The Pensions Regulator (TPR). With TPR assessment, superfunds are a real additional option for employers and trustees looking to secure their scheme benefits in full but where buyout is not an option.

So which schemes will be the first to complete a deal?

The superfunds will need to build up scale quickly, and so larger transactions are likely to get the most priority. Similarly, those with a clear burning need to transact are likely to be amongst the first. The earlier entries into a superfund might, for example, include schemes:

  • in PPF assessment, that could not afford to buy out benefits in full with an insurer, but have a chance at achieving full benefits with a superfund if a rescue is permitted;
  • that are relatively well funded but with sponsors that have a weak covenant or are close to insolvency;
  • whose sponsoring employer is undergoing events such as merger/acquisition/restructure/divestment/refinancing;
  • with a weak UK sponsor and a stronger overseas parent willing to fund to superfund level but not buyout.

Where does this leave the rest such as smaller schemes?

Superfunds could improve the outcome for small schemes and so the hope would be that this option is available especially if small schemes are finding it harder to get quotes from insurers for buyout. We expect superfunds will try and help smaller schemes over time, but smaller schemes may need to be prepared to wait longer and to be pragmatic, for example keeping the process simple. The costs of preparing for a superfund transaction relative to scheme size should also not be underestimated, as the clearance process for superfunds is new and is likely to evolve and become more efficient over time. 

Will there be enough capacity to deal with demand?

Currently there is only one superfund that has completed TPR’s assessment, but another superfund, the Pension SuperFund, is also undergoing assessment. Although Clara-Pensions and the Pension SuperFund’s business models are very different, they are both trying to achieve a better outcome for members through consolidation and third party capital support. Of course, having more than one assessed superfund to choose from rather than one would give more choice and less risk of capacity issues for schemes in need of this solution.

What happens next?

We won’t see transactions happening straightaway. Clearance from TPR will require assessment of the individual transaction and further scrutiny of assessed superfunds on any issues not covered in the initial assessment, such as capital adequacy. Trustees are also expected to do their own due diligence but can take some comfort from and build on TPR’s assessment. So we will need to wait a bit longer for the next milestone of first superfund transaction – hopefully in the first 6 months of 2022.

If you would like more information or to comment please contact Paula Haughton.