Superfunds – a new opportunity for scheme sponsors?
15 Oct 2018
Emerging 'superfunds' have caught the eye of scheme sponsors. They are consolidation vehicles aiming to allow defined benefit (DB) scheme sponsors to remove all future liability and risk associated with their scheme for an immediate known cost.
Superfunds operate under the existing pensions regulatory and legal framework, rather than an insurance framework. They aim to be able to provide a full risk removal outcome for sponsors at a price below buy-out pricing.
The appeal of superfunds is therefore clear for a sponsor. Trustees and members will have additional considerations around the relative security of a superfund versus the reliance that can be placed on the current assets plus the sponsor’s covenant to meet the liabilities and pay benefits in full. However, for a number of schemes, the superfund offering may provide a solution for all parties.
There are currently two consolidator offerings developed – The Pensions Superfund and Clara-Pensions. However, more consolidators are expected to emerge as this market develops.
The Pension Superfund (PSF) is a non-sectionalised pension plan. It looks to mirror existing member benefits, with the long-term aim of running all liabilities off within the PSF. Sponsors are to provide 105% funding on the PSF self-sufficiency basis, with investors providing a further 10% of capital, thereby providing support for 115% of the self-sufficiency funding position at the outset. If funding improves, excess assets are to be distributed 1/3 to members and 2/3 to investors.
Clara-Pensions is a sectionalised pension plan, which mirrors existing member benefits. Sponsors are required to provide around 90% funding on a buy-out basis, with investors providing the additional 10%, therefore providing 100% of buy-out cost at outset within its own section. If funding improves beyond buy-out, the liabilities will be insured and any excess assets returned solely to investors.
A key consideration for trustees is whether the replacement of the sponsor’s covenant with additional one-off funding from the sponsor and the capital provided by the superfund enhances the likelihood that members will be paid their full benefits in the future.
The trustees therefore have the difficult task of evaluating the benefit of the longer-term covenant provided by the sponsor to the scheme against this additional one-off funding and capital provided in the superfund. It is likely some outcome modelling, incorporating the current funding and investment strategy as well as the current and expected future covenant, will need to be carried out to understand which of these outcomes might be beneficial.
Each assessment will be specific to each scheme and sponsor, reflecting the unique combination of their current funding position and investment strategy and the strength of the covenant provided.
Trustees will also require clarity around the regulatory framework for consolidators going forward - this framework is still under development
Although each case will be unique, there are likely to be certain schemes where superfund consolidation is clearly unattractive and others for which it is more suitable.
For example, trustees of currently well-funded schemes, which enjoy a strong employer covenant, may not consider the small additional increase in funding and capital attractive when compared to the ongoing covenant provided by the current employer. These schemes may have a high probability of achieving an insured buy-out in a relatively short term.
However, for less well-funded schemes with concerns over the long-term covenant provided, the additional immediate contribution and capital support may be more appealing. For well-funded schemes with weak covenants, the option may also be attractive if the possibility of full benefits for members may be achieved with the consolidator, where this would not be possible through a buy-out.
There may also be certain event-led scenarios such as a company sale where the consolidator route may be an attractive option provided the company being sold is able to finance the premium required by the relevant consolidation vehicle.
When considering a superfund solution, we are able to assist both sponsors and trustees in these areas required, including:
understanding the key features of each offering and the solution they provide, including their respective pricing, implementation mechanics, investment strategy risk and long term risk security
considering all alternative options, including a solvent scheme run off, any possible longer-term insurance solution and the difference between the current covenant and the additional funding and capital outcomes
assessing the current, and likely future, covenant strength
modelling various actuarial, funding and outcome analysis
undertaking transaction and insurance-contract-type due diligence.
What does all of this mean?
If superfunds develop into a practical alternative for sponsors they may be an interesting option for potential full risk removal, alongside the existing bulk annuity market.
However, the offering is in its infancy at present and further clarity is required around the regulatory framework and the development of a range of possible solutions via different consolidators before we can reach such a positive conclusion.
Our pensions advisory team has an extensive range of covenant and actuarial expertise and have undertaken a large number of transactional and insurance due diligence projects for both sponsors and trustees.
If you would like to investigate a possible superfund solution further for your scheme, please contact your usual Grant Thornton contact or Kevin Hollister.