Consolidators and superfunds | Feature


record. We could see more interest and confidence being built after a few deals are done.”


THE 5% CLUB


While there has not been an onslaught of activity, interest has been sparked as evi- denced in a study by Hymans Robertson called DB Consolidation: One year on. It shows that the two superfunds are sitting on a joint pipeline of £20bn worth of deals. The Pension SuperFund, which accounts for the bulk of this at £15bn, has already announced


two transactions since its


launch last year. The first is with an unnamed pension fund and the second is thought to be with a £300m UK pension scheme of a foreign-owned private company. Clara Pensions, which the report says has £5bn under its belt, has not made any public pronouncements.


In the near term though, the percentage of pension funds that are suitable for this type of arrangement is likely to be a fraction of the total universe – at perhaps just 5%. This could, of course change, and larger schemes may be attracted as the model develops and matures. Initially, as outlined in the KPMG report, the first movers are expected to be pension plans where the sponsor is going through some form of transaction or restruc- turing, or those who are part of larger groups and their plans could impact the UK pension plan. This is reflected in The Pension SuperFund’s deal.


second


full benefits even though they are covered by the PPF.


Then there is buy-out; a market which has doubled in the past year but is still nibbling away at the more than £2trn of liabilities on corporate balance sheets. “The consolidator or superfund model offers an alternative and Clara differentiates in that we offer an accelerated model to buy-out – achievable in perhaps seven to 10 years,” Williams says. “We are not the same as insurance. We are not subject to Solvency II and can invest in a broader range of assets.” Antony Barker, managing director at The Pension SuperFund, also believes smaller schemes need an alternative. “A key prob- lem is that around half of UK pension schemes are sub-scale and they have not had access to best advice. Maintaining high standards of governance has been a chal- lenge too, as pointed out by the TPR con- sultation paper [issued in July on trustee- ship and governance],” he says. “However, regardless of the size of their scheme, peo- ple getting the same benefit promise rea- sonably expect the same results and want their pensions paid in full.


“In many respects, consolidators and insur- ance companies are similar in that we both


generate surplus that we share with our members.”


IT’S GOOD TO TALK


Looking ahead, it is too early to determine the shape of the superfund industry and how many firms will join its ranks. Many though believe they will fill a gap and become a useful alternative to the other endgame choices available.


One of the challenges is making sure that communication channels are open, says Jo Holden, Mercer’s UK chief investment officer. “There will need to be enough trans- parency around their investments to make sure decisions around asset allocation can be aligned in advance,” she adds. “Otherwise we could have a situation akin to trustees buying into a blind pool of pri- vate equity and debt. They are not subject to the same regulatory regime as insurers and while that may be reflected in pricing, there needs to be a good dialogue between trustees, members and the sponsor about the strategy.” Sebastien Proffit, head of portfolio solu- tions at AXA Investment Managers, says that on paper, consolidation looks great, but in practice more time is needed to tell


We are not the same as insurance. We are not


subject to Solvency II and can invest in a broader range of assets. Richard Williams, Clara Pensions


Richard Williams, director of policy and communications at Clara Pen- sions, believes that size is definitely a factor when considering the consolidation model. He points to figures from the PPF’s Purple Book 2018 which show that of the 5,450 DB schemes listed, 35% have fewer than 100 members and another 44% have fewer than 1,000 members. Williams notes that there are currently three options – to stay with the employer, although there may be a risk that if the sponsor is weak members will not get their


gain from economies of scale and superior management,” Barker adds. “However, a key difference is that if trustees want a full insurance buy-out, they have to get their portfolio into a nice matching transferable state and that costs several percentage points.


“That is not the case with us. We are a long- term run-off vehicle and the benefit we bring is our ability to invest in long-term illiquid and private market assets which can improve investment performance and


whether it is an ideal endgame. “At the end of the day, schemes need to look at the cost, governance and the ability of superfunds and all endgame solutions to pay pension- ers.” He adds that to efficiently fulfil benefit payments many schemes are considering a cash-flow driven investment strategy. “The strategy may represent a scheme endgame in terms of self-sufficiency, or it could rep- resent a suitable and beneficial step towards alternative longer-term approaches such as buy-out or consolidators.”


Issue 87 | October 2019 | portfolio institutional | 45


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