TPT Retirement Solutions’ plan to launch a run-on superfund has been welcomed by industry figures for offering a potentially lucrative alternative for defined benefit (DB) pension schemes other than a buy-in/buy-out pension risk transfer solution.
TPT’s superfund will enable schemes to pool their assets and run them on, potentially delivering additional surpluses for scheme members. It differs from the only existing superfund, Clara-Pensions, which is designed to provide a bridge to buy-in or buyout for schemes that have pooled their assets.
The announcement comes as proposed changes to pensions regulations look set to provide a further boost to innovation within the scheme consolidation space.
“Choice is good,” said Bina Mistry, Head of Corporate Consulting at WTW.
“Each scheme is going to have its specific reasons for why it wants to do a transaction and what it values more, so current and new superfund models in the evolving and innovative DB landscape provides further choice and different outcomes for sponsors and trustees compared to other traditional solutions.”
The superfund concept emerged in 2018 to help struggling schemes to improve their funding positions by pooling their combined assets and give them the scale to access potentially higher investment returns to help plug funding shortfalls.
In TPT’s run-on model, transferred schemes will be eligible for surplus sharing after five years. The proposal has been in preparation for more than a year and is now with regulators. TPT Chief Commercial Officer and Managing Director Nick Clapp said he expects the superfund to gain approval in the next few months.
“We’ve started having conversations with consultants about superfunds so they can begin thinking about what is in their pipeline and who this would be relevant for, but we expect the conversations will become more meaningful midway through Q1 next year,” Clapp said.
TPT anticipates the first transfers to be transacted early in 2027, assuming TPR approves the superfund. Interest has been strong, with a handful of schemes already making inquiries and snowballing interest in its launch hastened the recent announcement.
“Given the progress we have achieved to date, and the interest exhibited by the wider market, now felt like the right time to make our intentions public,” added Clapp.
While pensions services provider LCP said the TPT vehicle would add “further momentum to the growth in the superfund market” by “widening the options for schemes,” few, including Clapp, expect it to make a huge difference to the UK PRT market.
Superfunds are a niche option with just 3% of trustees surveyed by Standard Life in October saying they are exploring them as a de-risking strategy. (Bulk annuity purchases remained the preferred choice, the report stated.)
Since completing its assessment with TPR four years ago, the Clara-Pensions superfund has attracted a handful of schemes so far, including the 730-member Church Mission Society Pension Scheme, which transferred its £55m in assets in June to become the fund’s fourth scheme.
“With two superfunds and considering the capital at their disposal, in all reality, it’s not something that’s going to shift the dial,” said Clapp.
“I don’t think that this is necessarily going to make a difference to the bulk purchase annuity providers that will still be writing around £40bn a year.”
Government proposals to give sponsors easier access to surpluses, a prospect that makes run-ons more likely, could make superfunds like TPT’s more attractive. But experts believe consolidation will get more traction from planned changes to pension rules that are designed to make the establishment of superfunds easier.
The draft Pension Scheme Bill proposes removing the so-called second “gateway test” of fund eligibility, which limits transfers to schemes that have “no realistic prospect of buy-out in the foreseeable future”.
This will make superfund transfers viable for about half of the UK’s more-than 5,000 DB funds, according to the LCP commentary.
“As sponsors and trustees evaluate their objectives and endgame options, superfunds will definitely present a viable alternative, which facilitates the removal of balance-sheet risk quickly,” said WTW’s Mistry.
“The changes to the potential scope of the market that becomes eligible for superfunds and the types of models that may facilitate a ‘run-on’ share-with-members type to improve benefits means more schemes should consider the full range and fully test which objectives are most important to them.”
Clara Pensions superfund transferees – CMS, retailers Sears and Debenhams, and construction company Wates – have ranged in size by assets and membership, with the Sears transaction valued at £590m and with 10,000 beneficiaries. The firms that have shown interest in TPT’s proposed scheme have been in the £100m-£400m range, said Clapp.
“That plays to where we thought our target market might be,” he said.
The company doesn’t expect scheme size to be the only determinant of uptake; covenant strength is also likely to be a differentiator, with schemes under the weakest agreements more likely to consider the TPT route. Industry type may also come into play, with construction-based schemes likely candidates.
Smaller schemes, however, may benefit in the longer term.
“It’s going to be quite hard for small schemes initially to fully explore this market until there is some critical mass for a superfund,” said Mistry.
“However, once you have significant scale, there will be value in the smaller schemes too and the economics of deals can become attractive to capital providers, especially if the superfund model consolidates assets and liabilities into a single section and there are long periods to extract and share value.”