Mike Smedley, partner at Isio said: “Clara-Pensions are now at the races, having passed TPR’s initial assessment. Trustees can now look at superfund options with more confidence and we expect approvals for others to follow relatively swiftly. But, any deals still need to be cleared individually by the Regulator so there’s still some way to the finish line.
“Superfunds potentially offer a win-win for pension funds and members, providing additional capital to secure members’ benefits. A key question is whether they’ll be allowed to rescue pension schemes of insolvent sponsors out of the PPF assessment process – which could be perfect candidates for a superfund.”
Tom Hargreaves, Principal and Senior Consultant at BW, said: “We have seen continued interest in DB superfunds over the last couple of years, despite the uncertainty around the regulatory assessment process. The Regulator’s list of assessed superfunds has remained blank since the publication of its guidance last year, but with Clara now having completed the assessment process, work on specific transactions can now begin in earnest.
“Whilst it may still be some months before the first transactions receive formal clearance, this is another clear step forwards for this market and gives trustees and employers confidence that superfunds are a genuine endgame option. The Regulator’s robust assessment process should also give trustees a significant base to work from in determining whether this is the right option for their members.
“However, there remains uncertainty in the market, with no indication of timescales for other superfund providers completing their assessment processes. Schemes looking to superfunds as a long-term objective will need to be sure to retain the flexibility to adapt to new information as it emerges, whilst those considering a transaction in the short- to medium-term should engage with their advisers, the superfunds and TPR as soon as possible to give themselves the best chance of getting this done.”
Patrick Lloyd, Principal in Mercer’s Risk Transfer team: We are very pleased to see The Pensions Regulator completing their first assessment of a defined benefit (DB) superfund following a detailed due diligence process. This regulatory vote of confidence will see a number of schemes now looking at superfunds as a viable endgame solution for their membership.
Whilst a superfund transfer will not suit all schemes, for some it may be a suitable “contingent” solution to switch to should the sponsor covenant weaken significantly on the journey to their long-term destination. It is likely that there will be cases where a superfund will improve the chance of delivering members’ benefits, for example where the sponsor is weak or insolvent. However, trustees and sponsors should not see this as a lower cost alternative to buy-out simply by comparing prices today. It is important to consider how superfunds might form part of a scheme’s long-term journey and the likelihood of member outcomes under different endgame solutions.
Iain Pearce, Senior Risk Transfer Consultant, Hymans Robertson, says: “This is a landmark day in the history of defined benefit pensions as it opens up a new endgame for schemes that has not previously existed. This will provide more options to protect members’ benefits, especially for those schemes where there are significant doubts about their ability to be able to insure benefits in full at some point. Since The Pensions Regulator (“TPR”) released its guidance for superfunds over a year ago Clara-Pensions has been working hard to support the diligent assessment by TPR against this guidance and has now been added to the TPR website confirming that it has completed this assessment.
“Adding Clara-Pensions to its website signals to the pensions world that TPR is now willing to accept clearance applications for individual transfers and is a massive confidence boost to an industry which has been waiting a long time for further developments after the superfund guidance was issued in the middle of 2020. While TPR still expects ceding trustees to perform their own extensive due diligence, the guidance for trustees and sponsors acknowledges that comfort can be taken from TPR’s own assessment.
“The likely candidates to be the first schemes to transfer to a superfund are already very well progressed and have been engaging with TPR for some time. Therefore, we’d expect those first applications to be submitted very quickly, and we may see the first transfers finalised in 2022. However, the requirement to get TPR clearance for every case means that TPR’s initial assessment is not the final hurdle. We expect TPR to closely scrutinise all cases, paying particularly close attention to the first movers. Indeed, TPR notes that a number of key factors of their assessment, such as capital adequacy, will not be considered in detail until clearance applications are made.
“While TPR’s assessment against its guidance is key to transfers under current regulations, there remains, however, an expectation of a future dedicated regulatory regime for superfunds which may shift the goalposts for superfunds, trustees and sponsors. Therefore, regulatory uncertainty will remain for the time being.”
Adolfo Aponte, Managing Director of Cardano Advisory, comments: “The approval of Clara Pensions is a landmark moment for DB schemes. With surging demand for risk transfer solutions and the finite capacity of the insurance industry, consolidators have the potential to significantly improve the security of some pension benefits.
“The key point here is the strength of the corporate covenant - these solutions are likely to be more suitable for weaker sponsors where an insurer solution is unlikely to be realistic before covenant risk becomes too great.”
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