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Risk Transfer TV - XPS in conversation with Ashu Bhargava from Clara

Risk Transfer TV - XPS in conversation with Ashu Bhargava from Clara

09 Nov 2020

In this edition XPS' Jamie Hunter talks to Ashu Bhargava from Clara about how their model works, what it means for members and which schemes it is most appropriate for.

Jamie Hunter: Hello, and welcome to XPS Risk Transfer TV. I'm Jamie Hunter from XPS's risk transfer team. And today I'm delighted to be talking with Ashu Bhargava from Clara Pensions.

So we at XPS see pension consolidation as an exciting innovation in pensions which provides a new option for pension schemes to transfer risk and provide increased security to members. Ashu, do you mind explaining the Clara model to our viewers?

Ashu Bhargava: First of all, thank you Jamie for inviting me today. I very much agree that pensions consolidation is an exciting innovation that increases security for members. The Clara model is a bridge to buyout for schemes that cannot buyout in the foreseeable future and there are two main parts to our model. Firstly, in relation to destination, this is an insured buyout and is expected to be achieved within five to ten years of a scheme transferring to Clara. Secondly, a safer journey to buyout is achieved by mitigating three key risks: covenant, funding and investment.

In relation to covenant, Clara's capital buffer replaces the sponsor covenant which means that members will no longer suffer a reduction in their benefits in the event the sponsor becomes insolvent.

In relation to funding, contributions from the sponsor and capital provided by Clara ensure a 100% buyout funding level on day one in Clara. This funding position is expected to significantly increase as there is no return on capital or return off capital until every member has had their benefits bought out in the insurance market. The strong funding position means that Clara is able to and will adopt a low risk investment strategy.

Firstly, in relation to trustees, by transferring to Clara, members achieve a higher likelihood of receiving their full benefits. We're having a number of discussions where a scheme is able to buyout in the next five to ten years, but trustees are concerned that in the event of an insolvency of their sponsor before buyout is achieved, members will suffer a reduction in their benefits. The scheme's funding level is such that there would be no cost to transfer to Clara and Clara's capital would mean a much safer journey to buyout.

In other discussions, these have been around schemes that are expected to come out of the PPF and whilst insurers cannot provide full benefits, Clara can. In relation to sponsors, Clara provides sponsors with an affordable way of settling member benefits so that sponsors can focus on growing their business and at the same time improve security for members. We're having a number of discussions with sponsors where by bringing forward settlement of member benefits, value can be created within corporate activity and part of that value can be used to fund the transfer to Clara. In a similar vein, overseas parents are willing to fund the transfer to Clara as this brings forward settlement of member benefits and revitalises their UK subsidiary.

Jamie: So is it fair to say then that you aren't targeting a particular size of scheme?

Ashu: Yes we are size agnostic and currently we're in advanced discussions with schemes ranging from 10 million to over a billion pounds. Instead, we focus on schemes where we are able to add value by increasing the likelihood of members receiving full benefits.

Jamie: So based on your last point, does that mean that scheme profile is one of the bigger factors?

Ashu: Yes, scheme profile is certainly a bigger factor than size. Clara's price, when expressed relative to the cost of buyout, becomes more attractive where there is a greater proportion of deferred members and also a greater proportion of pensioners with an attaching buy-in. In a number of conversations with sponsors, they have indicated that whilst they've been able to afford a buy-in of pensioners, this isn't the case for deferred members and until now have been waiting for deferred members to become pensioners.

Jamie: And how long might a process take from initial engagement with Clara to transaction?

Ashu: There are two parts of the process for a scheme transferring to Clara. Firstly, there needs to be agreement between all of sponsors, trustees and Clara on the terms of the transfer, culminating in being able to demonstrate that there is an increased likelihood of members receiving full benefits within Clara. We are happy to work with the trustees and sponsors as quickly as they would like us to. The second part of the process then involves obtaining clearance from TPR and part of this process, TPR requires to be satisfied that currently the scheme cannot buyout and that in Clara there is an increase in security for members.

Jamie: Ashu, it has been a pleasure talking with you today.

Ashu: And thank you again, Jamie, for inviting me today.

It appears as though the Clara model could be a consideration for schemes that are well-funded but with weak covenants and cannot realistically afford buyout. We would encourage our viewers to see our XPS Insight publication on consolidators for further information and do get in touch with the Risk Transfer team to discuss consolidation further. Thank you for watching.