ASHU BHARGAVA: Thank you. And thank you for inviting me today.
LUNA FADAYEL: Now, to kick things off, can you please tell our listeners a little bit about what you do and your experience with superfunds?
ASHU BHARGAVA: Yeah. So I'm currently working with a number of trustees and sponsors who are investigating superfunds, and together we're determining whether superfunds could meet their objectives.
I rejoined WTW earlier last year after around seven years at the superfund Clara, where I led discussions with trustees and sponsors. Initially while superfunds were a concept and ultimately these discussions culminated in the first four superfund transactions.
LUNA FADAYEL: So you have had pretty much unrivaled experience in the superfund space. So it's brilliant to have you here today.
ASHU BHARGAVA: Thank you. Yeah. Good to be here.
LUNA FADAYEL: So let's start with the basics. In simple terms, can you remind our listeners what a superfund actually is and the problem that they try to solve?
ASHU BHARGAVA: Yeah. So a superfund is a commercial consolidator for schemes that can't afford buyouts. And they provide an option to increase member security and an option that allows employer to remove the pension scheme from its balance sheet.
So superfunds are required to provide a security at a level that is commensurate with a greater than 99% likelihood of members receiving full benefits. And if that leads to an improvement in security, a pension scheme's able to transfer to a superfund.
Now, if a scheme then transfers to a superfund, the cost is around 5% to 10% lower than buyout. And following a transfer to a superfund, the sponsor is replaced by a capital buffer. The scheme can then be removed from the balance sheet of the sponsor. And finally, the superfund trustees take over from the existing trustees.
LUNA FADAYEL: OK. So it sounds like it's somewhere between kind of the status quo and the buyout solution.
ASHU BHARGAVA: Yeah, absolutely. I think that's a good way of describing it.
LUNA FADAYEL: So thinking about-- I mean, you talked about your experience at Clara. So from concept, that initial concept, we have now seen five transactions with Clara. That first transaction, which was led by WTW was the Sears scheme, and that was back end of 2023. And we were really proud to be involved with this milestone deal.
But I'd be really interested to hear what it was like from your side when you were working at Clara at the time, and the sorts of learnings that came up and set the blueprint for future deals.
ASHU BHARGAVA: Yeah, very much agree. It was definitely a milestone, a huge milestone within the pensions industry. And I think the main reason for that was the confidence it gave trustees, sponsors, and advisors that a superfund transaction can actually take place.
At the same time that the first transaction was completed, we were having a number of discussions which turned out to be with the second and third transactions. And it was noticeable that once the first transaction had been completed, there was much, much more confidence to progress those transactions. And obviously, they culminated in being the second and third transactions.
The other element was that the pensions regulator, after the first three transactions had been completed, carried out a review and issued a blog, which I think they titled, "Insuring Superfund Transactions Progress as smoothly? As Possible." And within that they adopted a number of the approaches that WTW developed for that first transaction.
LUNA FADAYEL: And we talked about those first three transactions. So I think the interesting piece here is how those transactions have evolved. So that first one that we talked about, the series-1 had a weak sponsor in place. The second one, just a few months later, was the Debenhams deal, and that one was an insolvent sponsor, and it actually moved member benefits from PPF level benefits to reinstating almost full scheme level benefits.
But the third one, Wates, was different again, and this one was an ongoing sponsor. And I think you'd mentioned something about the speed of how quickly the company was able to reflect that being taken off their books in the accounts. Do you want to give a little bit more?
ASHU BHARGAVA: Yeah, no, no. Absolutely. So that transaction was announced 12th of December, 2024. And so that's the transaction being completed shortly before that. And the sponsor was able to remove the pension scheme from its balance sheet around 5% to 10% cheaper than the cost of buyout.
But what was noticeable was the speed at which it came off the balance sheet. So as I said, mid-December the announcement was made, and within the accounts year ending 31 December, 2024, the pension scheme was removed within those accounts. Very, very quick.
LUNA FADAYEL: The last year we had the fourth transaction, which was the Church Mission Society. And that one was different again, because this time there was something called a connected covenant. So could you give a little bit of detail around that?
ASHU BHARGAVA: Sure. Yeah. So as we've discussed, superfunds are required to provide a level of security that ensures that there's a greater than 99% chance members are going to get full benefit. What connected covenant does is it focuses on that less than 1% chance members don't receive full benefits. And in that situation under connected covenant, the company's then called on to make further contributions.
But it is worth noting that regardless of that contingent guarantee, the pension scheme is able to come off the balance sheet, and is in fact replaced with a note that reflects the contingent guarantee.
LUNA FADAYEL: Right. I see. So the link to the company's covenant is still severed, but you do have that guarantee in place for that 1%.
ASHU BHARGAVA: Yeah. And I think the reason audiences have got comfortable is because there's such a low probability of the guarantee being called on that they're comfortable then to remove the assets and liabilities from the company balance sheet.
LUNA FADAYEL: And then the most recent transaction was the Videndum one earlier this year. And this was slightly different again in that it was the first of Clara's small schemes proposition, I think targeting the 30 to 50 pounds million of assets under management.
So I think those five transactions show that there's been a progression in the superfund market. But the early perception was that superfunds were mainly for those weaker covenant schemes. Do you think that perception is gone now?
ASHU BHARGAVA: I think it has, to a large extent. I mean, schemes which do have weak covenants still consider superfunds. But if I look at the discussions that we're having with trustees and sponsors, the vast majority of those are with sponsors that have a stronger covenant. And I think that was always the expectation that superfunds would be for those kinds of sponsors.
But it was also, when you look back, it was also sensible or probably predictable that the first few transactions would take place with schemes which are with weaker or insolvent sponsors. But going forward, certainly when we look at discussions we're having, very much the type of sponsor very much would be described as an ongoing sponsor.
LUNA FADAYEL: And that brings us nicely to something I refer to at the beginning, which was that 2026 feels a little bit different. If you go back a year or a year and a half, superfunds were discussed, but they weren't really always seriously considered. And it feels that they seem to be more seriously considered in those boardroom discussions now. So what has changed? What has caused this change in mood?
ASHU BHARGAVA: Yeah, no. I agree. I've sensed that as well. And I think part of it is that trustees, sponsors, and advisors, there was a reluctance to consider superfunds for two main reasons. Firstly, there is no permanent legislation for superfunds, and secondly, there is only one superfund provider if we looked back about a year ago. And I think both of those obstacles have now changed over the last year. And I think that has led to a real step change in confidence and interest in superfunds.
So just a little bit more around that first change. Superfunds have been operating under something that's called the TPRS interim regime. And the pensions regulator introduced that regime so that pension schemes were able to benefit from superfunds before formal legislation was in place.
And that interim regime, two key aspects of it, one, the level of security. And I've already discussed there's a greater than 99% chance members within a superfund will receive their full benefits. And another key area is something that's known as the gateway test. And those are the tests that the pension scheme needs to pass in order to be able to transfer to a superfund.
What we saw last year with the pension schemes bill, which is now Pension Schemes Act, has indicated that there is now going to be formal, permanent legislation in place with effect from 2028. And I think that has given trustees, sponsors, and advisors a lot of confidence.
And when we look at what is known about the Pensions Act, there is probably only one main change compared to the interim regime, and that relates to the gateway test. Currently under the interim regime, there are three gateway tests. The Pensions Act has reduced those gateway tests to two. And those gateway tests are, one, a scheme needs to demonstrate that it can't afford buyout. And the second thing that the scheme wanting to transfer to a superfund needs to demonstrate is that there is an increase in member security.
So that's the first obstacle that was removed. The other obstacle that was removed, and the number of conversations I've had with trustees and sponsors who have indicated a real reluctance to engage in a market with only one provider-- last year TPT announced that they were entering the market. And their target market is schemes 50 million to 500 million. They're currently applying for approval from the regulator, which they're hoping to receive by the end of the year, which means early next year they could then complete their first transactions.
The pensions regulator has also indicated it's in discussions with another two providers who are looking at seeking approval. And I think we could see, by the end of the year, rather than having one provider, we could potentially have four, which I think once again will really increase confidence and interest in the superfund market.
LUNA FADAYEL: And is it right that those new entrants, and in fact Clara itself are considering different types of offerings? So Clara to date has been a bridge to buyout model. But I believe TPT is targeting a run on the star model. So, again, that opens it up, doesn't it, to trustee boards and sponsors who actually prefer one over the other.
ASHU BHARGAVA: And it seems to me, if a scheme is currently targeting buyout, then the Clara model, I think, works quite well. Because what the Clara model does is it retains that same objective that trustees currently have and could potentially provide a more safer journey to that destination or objective.
And I think for schemes or trustees that would like to run on, but have been precluded from doing so, either because they're too small or the sponsor doesn't want to run on, TPT now provide them with an option that enables them to run on, and then running on to generate value for either members or sponsors or both.
LUNA FADAYEL: Yeah. I mean, that all suggests a little bit of a change in mindset for trustees and sponsors when having these discussions. And actually I mentioned our endgame survey. So I'll just give a little bit of background to it.
In March and April of this year we surveyed around 135 different respondents, representing more than 300 billion pounds of UK private DB assets. So that's over a quarter of that market. And the survey gathered lots of insights. So it asked, what are you doing now? But I think the more interesting insights that it gathered were more about beliefs and views.
And one of the findings of that survey was that around 3/4 of respondents still see buyout as safer than superfund, with the remaining quarter seeing it broadly the same, so not weaker. So is buyout still that gold standard that trustees are aiming for? But I think one of the other things that came out of that survey that kind of has to be brought out at the same time is that one in four of those, 76%, would still consider a superfund if it offered better member outcomes.
So there's clearly some tension there, maximizing benefit security versus improved overall member outcome. And actually in my experience through conversations with different trustees, there's actually a real divide about the belief of where or what trustees believe their fiduciary duty is.
I've heard some trustees say, our job is to protect the benefits that have been accrued, and we're going to do that with a maximum possible level of security, and they like the sound of the insurance kind of buffer and protection offered there.
But others are more open to the idea that their fiduciary duty should actually be a bit broader than that. And it could be things like securing discretionary increases on parts of the pension that the scheme benefits wouldn't normally give increases to, and how surplus is used and shared.
So it's sort of moved away from being a technical debate to being, I don't whether you want to call it a philosophical debate or an ideological debate. So quite interesting how that's moved.
But I think what's also interesting that came out of that survey is although over 80% of respondents said they've carefully considered their end game option, more than half, I think it was close to 60%, said that they're going to review their strategy within the next two years. So obviously still very open to changes in the market and views.
So how should trustees approach their decision-making with all these different changes?
ASHU BHARGAVA: I think the first thing I'd say is, I think it's a positive that trustees and sponsors have many more options going forward. It's probably a stretch to say each of those 5,000 schemes is unique. But, I mean, certainly the cross section that I've come across, they all seem to be fairly unique. And whilst you're not going to have a bespoke solution for each of them, I think the fact that you've got more options than you had previously can only be a good thing in making sure that trustees and sponsors are able to meet their objectives.
I think I agree with you that there has been or currently is a shift in mindset. I think there are still trustees who will focus on maximizing security. And I think I would almost put them in two camps. Or if we look at the ends of the spectrum, I think you've got some where they really value the security that's provided by an insurance. And maybe one way of considering it is that superfunds provide a greater than 99% chance members are going to get full benefits, but that is less than the security an insurer provides.
And therefore, if you have somebody who really values the extra security, one way of describing where they're at is that they are willing to pay the extra 5% to 10% to achieve that extra security beyond a greater than 99% chance of members receiving full benefits.
Whereas I suppose the other camp could be described as, they take the view that security that's provided by a superfund is adequate, and they would rather see that level of security together with say, 5% to 10% higher value that could then be distributed to employers or members. And I think that's probably the key difference.
And once again, our end game survey did provide some numbers around that. The survey indicated that around 40% of respondents indicated that they found that the possibility of providing higher benefits through a superfund compared to buyout attractive. And also around 30% thought that if there was a, say, 5% to 10% reduction compared to the buyout cost, they would find that attractive.
So I think we are seeing that there is a shift. I think had we done the survey maybe a couple of years ago, I think we would have seen quite a different picture. But I think things are evolving, and part of it is the improved funding levels, and the fact I think then trustees and sponsors are asking themselves, do we retain that value within the pension scheme and distribute it to members and employers or do we buy out?
And I think one of the interesting examples of that decision-making or that choice was the recent Aberdeen Stagecoach transaction, where you had a group of trustees who had a scheme that had a buyout surplus. And they could have bought out benefits for members, but they chose to run on with a view of retaining value within the pension scheme and distributing it to members and employers.
And I think the terms of that distribution are 2/3 to members and 1/3 to sponsors. So I think all of that is indicating that there is a shift. And the fact that we've got surplus access legislation coming in with effect from 2027, I think you could very much see a scenario where trustees and sponsors have schemes that are funded above buyout currently. Then some of that is now able to be distributed to members and employers. And you could then get to a place where the scheme is now funded at a level where it could transfer to a superfund.
And so, once again, in that scenario, depending on trustee's objectives, you could have a scenario where members have received higher benefits, they transfer to Clara, and those higher benefits are then secured with an insurer within 5 to 10 years. Alternatively, they could transfer to a superfund like TPT where members already start with higher benefits and are expected to get even higher benefits whilst the scheme is running on with TPT.
LUNA FADAYEL: Yeah. And the Aberdeen Stagecoach deal actually is a very good example of how the industry is continuing to innovate. And people are not thinking about this a binary option. And there are all sorts of things in between that could be done.
So if I try and summarize where we've landed, I think we're hearing that superfunds are still not the default endgame route, but I think are becoming more mainstream. They're moving from that niche option, which maybe the likes of the Aberdeen Stagecoach deal now fall into, but they are now moving into more of the mainstream. Would you agree with that?
ASHU BHARGAVA: Yeah, I think that's fair. And I think it is all about the confidence trustees, sponsors, and advisors having superfunds. And with each transaction that we've seen, that is definitely increased. And the fact that we've now got permanent legislation with effect from 2028, and we've got more than one provider. We could have four. I think all of that builds even more confidence. And I think that is crucial to the move from niche to mainstream.
LUNA FADAYEL: Brilliant. Well, that's all we have time for today, Ashu. Thank you so much for joining us today. It's been really interesting to hear about your experience and your views of where you think things will go in this market.
And to our listeners, thank you very much for joining us for this episode of The Pensions Perspectives Podcast, brought to you by WTW. I'm your host, Luna Fadayel, and I look forward to joining you next time for another conversation that matters.
Thanks for listening. This podcast is for informational purposes only and does not constitute financial advice. The views expressed by any hosts and guests are their own and may not reflect those of their employers or affiliated organizations. All content is protected by copyright.
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