Superfunds – Feature


insurers. “We don’t see superfunds as a replacement for insurance, they are not targeting an insurance level of guar- antee, but there are many schemes out there that can’t afford that level of guarantee.” He also stresses that just because there is no formal regula- tion on superfunds, the regulator is not toothless. “All our usual statutory powers are available, just as they would be in relation to any other DB pension scheme within our remit. This means that, where there could be unacceptable risks to members, we will have the powers to deal with those risks.”


Investment strategy


The key factor which could help superfunds establish a com- petitive advantage is that they are more flexible than insurers when it comes to setting their investment strategy. Because superfunds do not promise insurance-like cover, they can afford exposure to riskier segments of the market. However, TPR has spelt out in its interim guidance that a higher risk strategy requires more cash to be kept in reserve. The Pension Superfund, for example, has a target allocation of 80% to its liability-driven investment (LDI) strategy, with the remainder in return-seeking assets. Barker highlights that unlike insurers, superfunds have more flexibility to adjust this target portfolio to the allocation that schemes already have in place. “Our actual strategy will be driven to some extent by the schemes we inherit,” he says. “One of our unique features is that we novate the schemes’ existing port- folios. That ensures that our transaction costs are lower. So, if people already have private equity, we don’t need them to sell it to provide us with cash and government bonds. “The return seeking assets are going to be drawn from pub- lic and private markets, but will probably allow us to focus more on private markets and illiquid assets because we expect that our peak cash-flows are going to be in the late 2030s to early 2040s so that gives us a lot of time to invest in illiquids. We can look at infrastructure, private equity, insur- ance-linked securities, land, property and other real assets,” Barker says.


Implications for trustees For better or worse, superfunds have the potential to funda- mentally transform the UK’s defined benefit landscape. The recent example of local government scheme pooling shows that where there is political will, billions of pension fund money could be shifted into a consolidating vehicle within less than five years, at which point there might still be no firm laws on superfunds.


The interim guidance has given trustees a lot to mull over, Issue 95 | August 2020 | portfolio institutional | 45


and early evidence suggests that the appetite for superfunds is there. David Weeks, co-chair of the Association for Mem- ber Nominated Trustees, predicts that given the deteriorat- ing market environment, trustees will come under increased pressure from sponsors to consider the transfer to a super- fund. This could be the case particularly in industries which have been hit the hardest by the Covid crisis. Schemes with a weakened covenant could now show increased interest in transferring their assets, he predicts. Weeks warns that superfunds in their current set up do not leave room for the presence of member nominated trustees, which could have an adverse effect on democracy and the ability of scheme members to have their say in the govern- ance of the scheme.


Whichever way trustees end up seeing these new players, their main responsibility should be clear, argues Clark at TPR. “For trustees considering a transfer, it is vital that they are doing so because it is in the best interest of scheme members.”


We don’t see superfunds as a replacement for insurance, they are not targeting an insurance level of guarantee, but there are many schemes out there that can’t afford that level of guarantee.


Chris Clark, The Pensions Regulator


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