Opinion: Superfunds: New solutions for DB pension plans

Isio
27 Feb 2020
City river embankment at dusk with commuters

What are superfunds?

Consolidation remains a hot topic in the pensions industry. Regulators and politicians believe that there are too many inefficient defined benefit (DB) pension plans and are actively encouraging consolidation.  There is a range of proposals that fall under the banner of consolidation but one of the most interesting is the emergence of financial consolidators, which are commonly called “superfunds”.

Essentially the superfunds involve a third party providing additional risk capital to replace the employer covenant of the sponsor. In principle this parallels a conventional insurance buy-out, but with greater risk, less regulation and at a price that’s more accessible for pension plans and sponsors. For a pension plan where buy-out is out of reach, a superfund could be the next best thing.

The superfund market is nascent but two providers are already actively in the market, with other products in development. The current providers, The Pension SuperFund and Clara-Pensions both operate in the existing legal framework and aim to undercut insurance pricing by up to 10-15%, depending on the profile of the pension plan. For a pension plan that is 70% funded against buy-out, that means the additional premium to move to a superfund could be half the cost of an insurance buy-out.

Should I look at superfunds?

The challenges for superfunds remain, particularly the uncertainty over the financial adequacy requirements and whether that will impact business models and pricing. They are currently undergoing testing and authorisation with the Pensions Regulator, whist the regulatory environment is still being formalised by government. For trustees, deciding to enter a superfund is a delicate balance between the “devil they know” and the unproven consolidator option. Assessing the package provided by the superfund is difficult, and comparing this to the employer covenant that would be given up is even more challenging.

But we do need to take the superfunds seriously. They fill a significant gap in the market and will appeal to trustees and sponsors who see the benefit of securing/settling their pension obligations but insurance buy-out is out of reach. In the right circumstances superfunds could provide better security at a lower cost than the alternatives, i.e. a win-win for all stakeholders.

They will only be appropriate for a minority of pension plans. But any trustee or sponsor looking at long-term strategy should include superfunds in their assessment. Even if a superfund isn’t appropriate in the short-term, they might open up a different journey plan for pension plans that otherwise need to take significant risks.

It is clear to us that the superfunds are ready to go and, we expect, here to stay. Our specialist superfunds team is already working hard to deliver the advice trustees and sponsors need in order to assess the superfund option against the range of alternatives and provide more secure futures for their members.

Where do I start?

We believe that superfunds will take-off and have established a specialist superfunds team to bring together all the key skills needed to help trustees and sponsors. In addition, we have produced a booklet with further information on superfunds, the providers in the market and whether you should be looking at a superfund. You can find a link to it above or by downloading it here.

Please get in touch with Isio’s Rachel Bradshaw if you would like to discuss superfunds or explore further whether the superfund option, and the alternatives, are right for your pension plan.

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