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Article | Pensions Briefing

Superfunds: the new kids on the block

Pension Board and Trustee Consulting|Pensions Risk Solutions|Pensions Corporate Consulting|Pensions Technology

By Hazel Kendrick | September 4, 2020

The pensions derisking market in 2020 has significantly broadened the spectrum of options available to trustees and sponsors.

The haircuts, the denim, the synchronised dance moves – as a teenager in the late 80s, at the time, the band “New Kids on the Block” had it all.

As a seasoned industry professional many years later, I am both pleased and excited to see several new kids on the block for the pensions derisking market in 2020, significantly broadening the spectrum of options available to trustees and sponsors. This has continued at pace in 2020, in spite of the COVID-19 lockdown.

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What is a superfund?

A superfund is a defined benefit pension scheme, overseen by TPR, to which other defined benefit pension schemes can transfer.

After the transfer, the sponsoring employer has no further liability. Sponsoring employers will typically make a final payment which serves to replace their covenant with that of the superfund, in effect a severance payment. This payment is partnered with additional capital from the superfund, creating a ring-fenced capital buffer to provide a degree of protection against downsides risks. The capital buffer concept is similar to that used by insurers offering a bulk annuity but is at a lower level, meaning superfunds are not as secure as bulk annuity insurers. However, that can be a moot point for schemes that will never be able to afford an insurance buyout.

Superfunds intend to aggregate multiple schemes, resulting in lower average running costs and potentially more efficient investment strategies that may generate higher returns for a given level of risk than many schemes might achieve on their own.

So far in 2020 we have seen: the buy-in, buyout and longevity swap markets continue to flourish; implementation of the first ever “bridge to buyout” third party capital solution; as well as the Pension Regulator’s (TPR) milestone announcement on the interim regulatory regime for DB superfunds. Whilst superfunds have been talked about and debated for a few years, TPR finally released this in June 2020.

A superfund is one of the “brothers making up the band” of newly available options for schemes that are unlikely to reach buyout in the shorter term.

Who are the superfunds?

Whilst there are two superfunds in the public domain so far, Clara Pensions and The Pension SuperFund, there are other organisations actively watching the development of this market with interest.

There are currently two alternative models of superfund, with different associated costs and risks:

Bridge to buyout model

Aims to get the transferred scheme to buyout with a bulk annuity insurer.

This is likely to take longer than the scheme could have expected on its own “all things being equal” due to the superfund needing to generate returns for its investors.

However, the superfund will aim to get the scheme to buyout with lower risk (greater certainty of success) compared with the status quo over the period.

Example: Clara Pensions

Long term run-off model

Retains responsibility for paying benefits from the superfund over the long term.

Long term run-off should offer extra flexibility to transferring schemes than the bridge-to-buyout model. However, as (by design) liabilities will not be bought-out, some trustee boards may be uncomfortable with what that could mean for their members over the very long term.

Extra features can be incorporated, for example a profit share with members.

Example: The Pension SuperFund

The emergence of superfunds and the advent of capital-backed journey plans present a greater range of options for trustees and sponsors regarding the future delivery of pension promises. These are undoubtedly positive developments, especially in today’s uncertain times, with more schemes thinking hard about their long-term objectives and the extent to which schemes are considering every possibility to ensure that full member benefits are delivered.

Routes to securing promised pension scheme member outcomes
Routes to securing promised pension scheme member outcomes

We will all be watching closely to see how market innovation evolves and how the emerging options influence the way trustees and sponsors approach future funding and ‘endgame’ discussions. One thing’s for sure, it seems unlikely that these particular new kids will be one hit wonders.


Senior Director, Transactions

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