Feature | Consolidators and superfunds
years as an alternative option for the declin- ing and fragmented DB sector. Around two thirds of the roughly 5,600 UK schemes have a funding shortfall and the situation is likely to deteriorate in the current economic and political climate. Research from Mer- cer shows that in August alone the com- bined pension deficit of FTSE 350 compa- nies grew by an estimated £16bn to £67bn as gilt yields were hit by fears of a global downturn and uncertainty surrounding Brexit. To date, only two firms have thrown their hats into the consolidator ring, and each has their own particular spin. The Pension SuperFund is seen as a ‘destination’ vehicle which takes the reins from the corporate sponsor and looks to hold assets and liabilities over the longer term. The econo- mies of scale generated can help drive down costs and improve investment returns to ensure that every pensioner is paid.
Clara Pensions, on the other hand, is often described as a bridge to an insurance buy- out, albeit in a shorter timeframe, and pen- sion schemes are kept in segregated sections.
The objective for both is similar – to reduce investment risk, strengthen governance and to wield greater influence over the fund management community. They are also seen as a cheaper route than the typical buy-out which insurance companies refer to as the “gold standard”. This is because consolidators are not subject to the capital and modelling requirements of Solvency II, which limits the types of asset classes insurers can invest in.
TEETHING PROBLEMS
The goal for the new breed, according to a report by KPMG, is to undercut insurance pricing by between 10% and 15%, depend- ing on the profile of the pension plan. For example, for a scheme that is 70% funded against buy-out, the additional premium to move to a superfund could be half the cost. While price always captures the attention, the focus for many market participants is
the regulatory discussions and wrangling between the UK government and regula- tors over the quantities of capital super- funds will need to hold to deliver on their pension promise. Last year, the Depart- ment for Work and Pensions (DWP) pub- lished a DB white paper which highlighted four options for defining capital adequacy for superfunds. These included three based on the current DB occupational pensions framework and one on an insurance-like structure. Based on the DWP proposals, the govern- ment issued a consultation late last year canvassing opinion from market partici- pants and watchdogs. It not only covered
superfunds have the potential to provide greater security for some schemes, it has said that unconstrained they “pose signifi- cant risks” to the PPF. It is calling for a detailed consideration of the inner work- ings of superfunds to guarantee that a robust regulatory charter is established. In the meantime, The Pensions Regulator (TPR), which is expected to be tasked with the oversight and approval process, has launched its own guidelines. They not only aim to identify, assess and mitigate risk, but also assess whether the business model is financially sustainable, has strong gov- ernance and is able pay members’ benefits as they fall due. The Pension SuperFund
We could see more interest and confidence
being built after a few deals are done. Alistair Russell-Smith, Hymans Robertson
the capital buffers but also the wider regu- latory
agenda, minimum standards for
authorisation and operation including gov- ernance, accountability and financial sustainability. Criteria for transactions and supervisory processes were also in the mix. Feedback was expected in the autumn, but industry experts are unclear exactly when the results will be published given Brexit continues to overshadow almost every sector and the UK is likely to hold elections before the year end.
Opinions though have been aired. The Pru- dential Regulation Authority (PRA), which oversees insurance companies, but will not regulate superfunds, made it clear that it is in favour of stricter rules that mirror the industry’s Solvency II. In addition, it voiced concern over the risk of arbitrage between regulatory regimes and that “the insurance framework provides an appropriate model” for pensions consolidation. The Pension Protection Fund (PPF), which would provide a safety net for superfunds if the vehicles collapsed, has also made its views known. While it recognises that
44 | portfolio institutional | October 2019 | issue 87
and Clara are working closely with TPR as well as government officials to ensure they are aligned with any future rules. While the industry expected formal regulation to be finalised in this year’s Pension Bill, the jury is out as to whether it will see the light of day given the present political backdrop. “I think we will see plenty of interest in consolidators, but regulatory uncertainty is holding activity back because of a lack of complete clarity on how exactly the TPR and PPF will view superfunds,” says Jos Vermeulen, head of solution design at Insight Investment. “As a result, I do not think we will see too many transactions being announced until there is more clarification.” Alistair Russell-Smith, partner and head of corporate DB consulting at Hymans Rob- ertson, adds that a lack of clarity over the authorisation process is partly to blame for transactions stalling.
“There are TPR guidelines and although they are recognised as a process, some trus- tees want to see a more formal regulatory regime,” he adds. “The other issue is that superfunds are new and there is no track
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