 By Tom Hargreaves FIA, Principal and Senior Consultant and Corporate ActuaryJack Sharman FIA CERA, Associate and Senior Consulting Actuary at Barnett Waddingham
In this blog we look at the developments we have seen in the market over the four months since TPR's announcement, and what we expect to happen next.
Clara-Pensions — what next?
Clara's milestone brought to an end a long period of uncertainty, during which they had held in-depth discussions with TPR about the detailed workings of their model for pensions scheme consolidation. Their attention has now turned to completing their first group of transactions.
Clara has some resource constraints as they work through their initial pipeline of schemes, and so have needed to prioritise. Priority is initially being given to:
larger schemes (likely with assets in the hundreds of millions of pounds) to enable Clara to build scale quickly, and to ensure that transaction advisory and administration costs are not disproportionate relative to the size of the deal;
cases where there are immediate employer covenant concerns (or even where an insolvency event has already occurred), meaning that trustees are keen to secure members' benefits quickly; and
cases where there is a need to transacts quickly for another reason - for example, where corporate restructuring or M&A activity is taking place.
Work is well underway on a number of these deals. The transaction process will not be quick, however, due to the need for employers and trustees to obtain 'clearance' from TPR in each case. It is expected that the first transactions will complete later this year.
Other DB superfunds
Of course, Clara is not the only player in the new superfund market. The Pension SuperFund (PSF) is proposing a different model for DB consolidation and has also been in detailed discussions with TPR for a number of years. Those conversations are still ongoing.
While PSF has not yet completed its initial regulatory assessment, we understand that they are optimistic about reaching that point in coming months. There is some additional complexity involved in PSF's 'run-off' model, compared with Clara's 'bridge to buyout' model, and we do not believe the longer time to complete assessment needs to cause concern for trustees and employers.
How are trustees and employers responding?
Clara's initial assessment by TPR was widely welcomed by the industry. Trustees and employers will have taken comfort from at least one vehicle now having met TPR's expectations for a superfund, and some schemes which have up to now been reluctant to invest time and money in investigating the superfund route are now starting to explore this new option in earnest.
As an initial step, we are delivering training to a number of trustee boards and employers on the new superfund vehicles and the underlying regulatory regime. Many schemes are now starting to consider how superfunds might fit into their long-term strategic planning; this could be either as a primary objective, or as a contingency to be implemented in the event of a journey plan (e.g. towards buyout) going off track.
We are still seeing a relatively narrow group of schemes being suitable for a superfund transaction in the short term. As we have set out in the previous briefings, schemes will need to have the right combination of funding level and employer covenant characteristics for such a transaction to make sense. However, the position can change rapidly and so having a good monitoring framework in place is key to make sure any transaction opportunities can be identified quickly when they arise.
Schemes which do pursue the superfund route will need to demonstrate that the proposed transaction is in their members' best interests, by reference to the 'gateway' tests set out by TPR. There remains some uncertainty around the process for engaging with TPR during the clearance process, and the level of analysis required.
The cost obtaining detailed actuarial, legal and covenant advice may be dissuading some smaller schemes from considering superfunds, but we expect (see below) that, over time, an established set of requirements will emerge and the transaction processes can become more streamlined.
Looking ahead...
In the short term, the market is waiting with interest for the first Clara transactions to be announced. The number of transactions completed is likely to be small during 2022, due to operational capacity constraints and the high level of scrutiny from TPR on each proposed deal. However, once proof of concept is established there is the potential for significant growth in 2023 and future years.
We also wait to see when PSF will complete their regulatory assessment process, allowing them to start processing their own initial transactions.
In the longer term, the key developments that we expect to see include:
an increase in resource to support growth in transaction capacity at both Clara and PSF, building on recent changes in senior leadership at both organisations;
streamlining of the transaction and advisory processes, which should make superfunds accessible to smaller schemes; and
the emergence of new entrants to the superfund market, if Clara and PSF prove to be successful.
We also expect to see continuing development of other innovative solutions to support pension schemes' long-term objectives.
Some of these make use of external capital and therefore share some features with superfunds, even though they technically sit outside the formal superfund framework. You can read more about these emerging models here.
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