Pension Scheme Consolidation

Summary

‘Superfund’ is the latest buzzword in the consolidation debate.

The expression was first coined by the Pension & Lifetime Savings Association (PLSA) in the second report from their Defined Benefit (DB) Pension Task Force.

Superfunds, if they catch on, could absorb existing DB schemes and, in return for financial consideration, permit employers to discharge their obligations in respect of transferring benefits. So, a key distinction between Superfunds and master trusts, which we considered in our third Consolidation article, is that, with Superfunds (sometimes call ‘commercial consolidators’), existing employer covenants are exchanged for a cash sum.

Strictly speaking, the amount of the cash sum (relative to the alternative of ‘buying out’ benefits with an insurer), the target market and the legislative framework for Superfunds are currently ‘known unknowns’. However, a picture is starting to emerge.

Pricing

Two Superfunds have already entered the market – The Pension SuperFund and Clara Pensions. Both aim to undercut insurance company buy-out pricing by up to 10-15% for the right pension plan. Depending on the funding position of a DB scheme, the potential reduction in buy-out cost could be material.

Market

The PLSA DB Task Force envisaged Superfunds being attractive to pension schemes with employer covenants that are ‘under pressure’ (i.e. employers that the Pensions Regulator would consider ‘weak’ or ‘tending to weak’). However, a lot of industry commentary has focused on the application to employers with stronger employer covenants that, whilst not in a position to buy out all benefits, can afford the consideration involved in permanently removing DB liabilities from corporate balance sheets via a Superfund.

In reality, the Superfund could have application to the full spectrum of employer covenants. For example, a weak employer may have been targeted by a private equity firm but that employer’s DB scheme could be a deal breaker. If the scheme could be ‘off loaded’ at a price that is substantially less than buy out then it could make all the difference between ‘deal’ or ‘no deal’.

Legislation

The final regulatory framework for Superfunds is not yet known. However, in their DB White Paper, the government promised that it would “consult this year on proposals for a legislative framework and authorisation regime within which new forms of consolidation vehicles could operate”. So, the proposed regime for Superfunds (which could impact both pricing and the market) could be known, at least tentatively, by the end of 2018.

Comment

Our view is that Superfunds will become an established part of the DB pension scheme landscape. We are monitoring market developments and have already met with current providers. When considering their de-risking options, we believe that sponsoring employers should include Superfunds in their deliberations.

In our next article, we will compare the pros and cons of the different consolidation options we have looked at over the past few months.

In the meantime, we hope you find this article of interest and if you require any further information on how consolidation might work for your DB scheme, please contact your usual JLT Consultant or our Head of Technical, John Wilson

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