A Superfund is a consolidating pension scheme that takes on private Defined Benefit
(DB) pension schemes from their original sponsors. By consolidating these schemes, the
Superfund aims to gain ‘economies of scale’ over individual schemes. The Superfund
guarantees member benefits by committing its own capital.

Under current legislation, Superfunds are not treated differently from other trust-based DB pensions schemes. Like other occupational DB schemes, they are regulated by the Pensions
Regulator (TPR) and operate under the framework created through guidance issued by TPR.

Regulatory reprieve

The Government released its response to the 2018 consultation on ‘Consolidation of Defined Benefits Pension Schemes’ in July 2023 with the headline message that Superfunds were a new, affordable option for sponsors for whom buyout is out of reach, to manage legacy liabilities and potentially increase scheme members’ likelihood of receiving full benefits.

In a bid to encourage innovation and further activity in the Superfund space (only one Superfund, Clara Pensions, has met TPR’s interim guidance and is able to transact with DB
schemes to date), and the broader DB consolidation market, the Government’s consultation and TPR’s subsequent review of its interim Superfund guidance set out changes – key amongst which was a change to Superfunds’ technical provisions valuation basis discount rate to Gilts + 0.75%, a move from Gilts + 0.5%. – which in effect reduced capital requirements for Superfunds to enable investor appetite.

The Government’s response was clear in its message that Superfunds are here to stay – further evidenced by the promise of a permanent regulatory regime being put in place when
‘parliamentary time allows’. TPR’s subsequent review of its interim guidance certainly provided a more supportive regulatory backdrop and should allow trustees and sponsors greater
confidence in proceeding with transactions in this space.

Recent transactions

Clara Pensions announced its second deal, worth £600 million, with the Debenhams Pension Plan in March 2024. Under the deal, Debenhams scheme members will receive their pensions
with no haircuts, which would have been the default in the absence of the Superfund option.

The transaction brought total assets under Clara management to c. £1.2 billion, alongside the £590 million deal with the Sears Pension Scheme at the end of 2023. Both transactions
involved pension schemes with distressed sponsors. So whilst Superfund activity is expected to increase over 2024, the next milestone will be transacting with a pension scheme that has a better covenant than those completed to date.

Government’s public sector consolidator proposal

During April 2024, the Department of Work and Pensions (DWP) consulted on plans for a public sector consolidator (PSC), that would be operated by the Pension Protection Fund (PPF), and making DB surplus extraction easier.

Under the Government’s proposals, the PSC would be targeted at schemes ‘unattractive to commercial providers’ and provide more choice to trustees and sponsors. Associated with this is the hope that by consolidating these schemes under the PSC, their investment strategy could be improved, with an allocation to UK productive assets, and associated benefits to members and the British economy.

As part of the consultation, DWP also stated its aim to minimise potential distortion of the Superfund and insurance buyout market. In order to achieve the Government’s aims around increased investment in UK productive assets, the PSC would have to operate unconstrained in order to achieve a significant scale – indeed a subsequent proposal from the PPF set out that the opportunity set for the PSC is small (this being, schemes that are ‘unattractive to commercial consolidators’) unless it is given free rein to target a broader range of schemes to enable it to deliver on the key Government objective of higher investment in UK productive assets. Under such an approach, it is difficult to see how the PSC wouldn’t disrupt the Superfund and insurance buyout market.

Commercial consolidators are relatively new to the DB market and are just getting started establishing Superfunds as a viable endgame option for DB schemes. It certainly feels premature to be making the case for a PSC when there has been no clear market failure that the PSC would be stepping in to plug. At the very least, to ensure minimal disruption to the existing Superfund and insurance buyout market, the PSC should be subject to similar regulatory parameters as the commercial consolidators.

Ultimately, although the results of the consultation remain to be seen, the DB market can read into the Government’s view that alternative endgame solutions, such as consolidators, are valid options for DB pension schemes. Regardless of whether the PSC is constituted, alternative endgame options for DB schemes are clearly here to stay.

But isn’t buyout the gold standard?

Many DB schemes are well on their way to achieving full funding on a buyout basis, an option which has long been seen as the ‘gold standard’ destination for mature DB schemes. Whilst this route is well established and is often the right, prudent choice for many trustees, the options for DB schemes that the DWP is consulting on and recent innovation seen amongst alternative solution providers provide challenge to the notion that a bulk annuity purchase should be the ‘default’ endgame solution for all schemes.

With the huge scale of DB pensions (market predictions of c.£350 billion) estimated to transfer to the insurance market over the next five years or so, there could be unintended systemic risks – further making the case for viable alternative endgame options.

Therefore, while buyout is appropriate for many schemes, it should not be the default. There are viable alternative endgame options, such as Superfunds, that can also deliver a safe
outcome for members as well as delivering a good outcome for corporates and the economy as a whole.

This article can be found here from the Pensions Aspects magazine by the PMI.