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Article | Pensions Briefing

What does the approval of the first DB superfund mean for trustees?

Your questions answered by a panel of experts

February 24, 2022

The Pensions Regulator has granted approval for the first defined benefit (DB) superfund, Clara-Pensions. What does this mean for pension schemes and the wider industry? A panel of experts explains.
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Costas Yiasoumi (CY): In a nutshell, what is a superfund?

Hazel Kendrick (HK): It's a defined benefit (DB) pension scheme that is set up specifically to receive bulk transfers of assets and liabilities from other DB pension schemes. Typically a pension scheme joining the superfund would also contribute a cash injection, payable by the sponsor. This is put together with the superfund investors’ capital to create a separate buffer account. The account would be called upon if the superfund needed to top up the funding level in future.

Superfunds offer promised benefits at a cost that is lower than that of an insurance buyout. A superfund is a for-profit entity, investors will expect to make a profit in return for putting up the buffer capital.

Finally, transferring to a superfund removes the employer covenant, which is a type-A clearance event. The scheme’s sponsoring employer will therefore need to seek clearance from The Pensions Regulator.

CY: Jane, DB trust-based schemes have been around for decades. Through a lawyer's lens, are superfunds a fundamentally new structure or are they just a twist on something we're all familiar with?

Jane Kola (JK): Superfunds are largely the same as other pension schemes. The twist is the fact that the employer is a different entity with a different source of capital. But when you scratch underneath the surface, superfunds are DB pension schemes. They look the same. They feel the same. They comply with the same laws, and they are in many ways regulated in the same way, although obviously to a much higher degree, by The Pensions Regulator. They are not something that a trustee board should find completely alien. Superfunds have some characteristics that are unusual, but most of their features should be very familiar.

Superfunds are largely the same as other pension schemes…when you scratch underneath the surface, superfunds are DB pension schemes.”

Jane Kola | Partner, Arc Pensions Law

CY: Hazel, many of our clients are thinking about what this means. Will the Regulator’s announcement that Clara was given a green light by TPR at the end of 2021 really make that much difference?

HK: I think clients are really interested in superfunds. Even when they are working towards an insurance buyout, there's still a lot of curiosity and interest in superfunds. For clients who are working hard to run their schemes with weaker covenants, there will be circumstances where a superfund transfer improves outcomes for DB members.

We mustn't forget that the Pensions Institute estimates that there are about 1,000 UK schemes whose funding and covenant means they will never make it to buyout. In other words, those schemes will not be able to pay member benefits in full.

When we look at WTW’s Emerging Trends survey, over 80% of our client base are expecting to reach their long-term goals in between five- and 14-years’ time.”

Hazel Kendrick | Senior Director, WTW

When we look at WTW’s Emerging Trends survey, over 80% of our client base are expecting to reach their long-term goals in between five- and 14-years’ time. If you're in that latter group, a 10-year-plus timeframe is a long time, and we know that sponsor covenants can change very quickly. So, I think what will really make a difference is if Clara and other incoming superfunds can rapidly build scale and anchor the superfund model within the pensions industry.

CY: Tiziana, as a professional trustee, what are the key messages you would communicate to members when informing them of a transfer to a superfund?

Tiziana Perrella (TP): I think that communication with members is going to be slightly more involved, particularly for the early transactions, compared to buy-in or buyout which is a known quantity. We will want to convey more information on what a superfund is, particularly the strict regulatory environment in which they operate, to reassure members. We’d explain the rationale and the process which has been followed to get to the decision to make the transfer.

In reality, some things are changing and some things are staying the same, and I think some reassurance and explanation of what is changing and what is not changing, as well as what the next steps are, will also be very important and interesting to members.

CY: Hazel, looking through the client lens, what are the questions about superfunds that are commonly asked?

HK: The conversations that I've been having with clients have really led on that affordability question. So: what is the funding level? How much money might be available from the sponsor for a cash injection? And most of the discussions that I've had then go on to: “Oh unfortunately, there's still a bit of a gap.” The conversation then becomes: “How do you bridge that gap?”

A member options exercise is a possibility to make the gap a bit smaller. Then, depending on how precarious the sponsor covenant is, they could combine a solution like a buy-in for pensioners with a superfund transfer for deferred members, the latter being more expensive for bulk annuity insurers to insure. Is that a more affordable way of delivering those promised benefits?

These conversations should be focused on the broad direction of travel. Then, if a decision looks like a no go, trustee boards can halt the process early and avoid high advisory fees.

Other questions I’m asked are about sponsor affordability: is additional capital available from the sponsor, and if not, are there other ways to bridge the gap? Will the covenant advice support a superfund transfer? Is it a fact that the covenant is not strong? Is the accounting treatment a showstopper for the sponsor?

Another point schemes should cover at an early stage in discussions is their governance considerations. Who needs to be informed during the process and when? What sign-offs are needed? By whom? Schemes should cover these points early.

CY: Jane, in the industry, we talk about covenant, usually in the context of financial strength. But often the legal value of covenant is far more important than any funding that's available from the employer. Can you elaborate on why that is the case?

JK: The legal covenant is the length of time that a scheme has to be able to run, by reference to the length of time that their employer can survive. Whilst the employer is trading and is able to continue, so the music continues, but if the employer becomes insolvent, the music stops. That's the point at which the scheme then gets funnelled into the Pension Protection Fund assessment process and all of the issues that go with that emerge. Ninety-nine times out of 100, members end up taking a haircut or reduction in promised benefits. So that legal covenant is really the ‘asset of time’ and the asset of time is basically cut off.

What excites me in many ways about superfunds is that they are a way of creating an asset of time when the sponsor’s legal covenant runs out of time, and perhaps it gives members the opportunity to get to full benefits, because the time would be there to do it. Whereas under the current law, essentially, if the music has stopped, the haircut has to be taken.

CY: Tiziana, if you were choosing a superfund, what actuarial advice and analysis would you want to help you to make the decision?

TP: We would want to see some projections of potential outcomes at the individual member level. It's not easy to model, because you're not just looking at the assumptions. You are also considering various likelihoods, so essentially, scenario modelling. You are evaluating the possibility of insolvency for the sponsor and potentially, the likelihood that these superfunds will eventually fail. Trustees will be trying to build a precise picture, or as precise as you can be at the point that you make a decision. All you can do is to determine that the balance of probability is that the decision to transfer is a better decision and will most likely lead to better outcomes for members. This needs to be at the heart of any decision.

I cannot stress what a huge responsibility it is. We really want to make sure that the decision-making process and the advice is robust.”

Tiziana Perrella | Professional Trustee, Dalriada

I cannot stress what a huge responsibility it is. We really want to make sure that the decision-making process and the advice is robust. Having said that, nobody can guess the future and sometimes, you are judged with the benefit of hindsight. So really, you want to make sure that everything is as clear as can be and that your reasons are documented.

CY: How long will the process of moving into a superfund take, from aspiration through to completing the transaction?

TP: I think if the data work has been carried out in advance, along with modelling, that will save some time, but there will be more work to do with the clearance and certification process. I think it will probably be a similar length process to a bulk annuity: say six to nine months.

CY: Are superfunds a positive development?

JK: I absolutely think they are. We don’t have enough options for DB pension schemes to run their journey as far as they can. Superfunds give them extra time, which is the one thing that other options do not give them. I think this is a fantastic development and I hope it will develop well for schemes and give members better outcomes.

Thank you for reading. If you would like to learn more about superfunds, please contact your WTW consultant, Costas Yiasoumi or Hazel Kendrick. You could also read our interview with Clara’s chief executive, Adam Saron, or find out the six steps trustees should take when they’re thinking about moving into a superfund.


Senior Director, Transactions
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Senior Director, Transactions
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