The UK government’s proposed reshaping of the defined benefit (DB) pensions landscape has become law, with approval given to a measure that could stimulate the creation of more superfunds.
The Pension Schemes Act received Royal Assent at the end of April and will be gradually implemented over the coming months and years. Among its many intentions, the Act will codify the operating rules and expectations of superfunds, which currently operate under interim guidance from The Pensions Regulator (TPR).
Superfunds are designed to help the members of smaller and struggling DB schemes improve their funding positions by pooling their combined assets, giving them the scale to access potentially higher investment returns and to help plug funding shortfalls.
The relevant regulation and a Code of Practice written by TPR are expected to be introduced by 2028 after a period of industry consultation.
Back in 2021, Clara-Pensions received regulatory approval to commence operations and remains the only active superfund, but with the Act in place, more are likely to come online, said Ryan McKenna, Pension Risk Transfer Specialist at WTW.
“This new legislation marks a clear shift from what has previously been policy intent to now providing policy certainty,” he said.
“I think that is important for prospective superfunds. My view is that the superfund market remains largely untapped; transactions so far are just scratching the surface of the potential opportunity.”
One of the key enabling changes that the Act introduces is the elimination of the so-called second gateway test, which experts say has stifled superfund creation so far. It had limited such transfers to schemes that have “no realistic prospect” of a buy-out by an insurer in the foreseeable future, a gauge that experts agree is difficult to determine.
“With this ambiguous test falling away, it is clearly a positive for schemes weighing up superfunds as an endgame option and prospective new entrants that are eager to get scale within this market,” McKenna added.
“It’s been a welcomed development for the industry as a whole.”
The current superfund market accounts for a tiny proportion of the £1.1trn UK DB pensions space, even after the members and assets of a fifth scheme, the Vivendum DB Pension Scheme, were transferred to Clara in April.
That Vivendum is the first listed company to transfer its pension scheme to a superfund is seen as a vote of confidence in the consolidation concept, especially for smaller funds.
“It shows that superfunds are becoming a credible, mainstream endgame option, capable of supporting transactions for schemes with a wide range of sponsor covenants,” said Jitin Tahiliani, Alternative Risk Transfer Specialist at Hymans Robertson.
Additionally, with a lower bar to entry, more schemes are likely to seek access to superfunds, stimulating their creation.
“With the likelihood of more transactions from Clara, along with recent confirmation from TPR that multiple organisations are actively discussing an entry to the superfund market, it is already shaping up to be a busy year in this space,” wrote Barnett Waddingham Partner and Senior Consulting Actuary Jack Sharman.
The likeliest candidates to opt for superfunds among the 5,000 or so schemes yet to de-risk are smaller funds and those that have not seen their funding positions improve in the past few years to the point where they can afford a buy-in or buy-out.
While pension risk transfers (PRT) using bulk purchase annuities are more expensive, they provide a guaranteed payoff for member benefits. Superfunds, by contrast, benefit from lower capital requirements and greater investment flexibility but because superfunds operate within the pensions framework, member promises remain entirely dependent on the fund’s individual governance and capital adequacy.
Ultimately, this upfront cost advantage means members exchange insurance-backed guarantees for a structurally different level of security.
Nevertheless, Hymans Robertson’s Tahiliani said the Clara deal was a sign that more smaller schemes would transfer to superfunds.
“It brings the value of scale and consolidation delivered by superfunds to the smaller end of the market, which is precisely the end that benefits most,” said Tahiliani.
Barnett Waddingham forecasts that the typical target scheme for superfunds would be those with assets of between £50m and £2bn. It used PPF data to estimate that this would encompass about two-fifths of schemes – equal to £380bn in assets.
Experts are confident that capital providers will enter the superfund market. In its revised guidance, TPR said prospective entrants were studying the market. There is also speculation that investors from North America, some of whom have already made inroads into the UK PRT market, might find the prospect of launching a superfund appealing.
“There are new and different opportunities for those and in combination with the permanent regime and the removal of that gateway test, I fully expect we’ll see new providers in this market in the not too distant future,” said McKenna.
“Ultimately, the capital will follow the opportunity.”
