LCP is calling on plan sponsors to work more closely with defined benefit (DB) pension fund trustees in considering superfunds as an innovative alternative to buyout deals.
The consultancy’s latest report, Leading the Way, disclosed that the majority of well funded schemes are considering an insurance buyout as their end target, with around a quarter (28%) of schemes surveyed saying they were considering a buyout market approach by the end of 2022.
The report warned that this means demand may outstrip market capacity – meaning that many schemes will need to remain in the funding regime for significantly longer than anticipated or, depending on circumstance, consider other innovative solutions such as superfunds.
LCP’s data predicted that if the superfund industry reaches £1bn (€1.08bn) over the next 12 months, there could be a rapid expansion to £5bn or more annual volume by 2023.
Steven Taylor, report author and partner at LCP, urges pension scheme sponsors to take a proactive role in setting pension scheme strategy.
“Sponsors can no longer take a back seat when it comes to pensions. A combination of new funding rules, economic turmoil and new legislation creating criminal sanctions for ‘getting pensions wrong’ means companies are going to have to be much more proactive when it comes to pensions,” he said.
LCP’s report identified three main factors as to why sponsors should work more closely with trustees:
- the arrival of superfunds and the closer proximity of many schemes to buyout;
- the increasing use of asset backed funding and contingent contribution agreements to protect schemes and allow them to share upside as sponsors recover; and
- a more defined role for sponsors in long-term decision making when the Pension Schemes Bill is made law.
Taylor stressed the importance for sponsors to consider an increasing range of options: “Without increased capacity in the derisking market, sponsors will need to consider alternative options such as agreeing efficient contingent funding arrangements.”
He added: ”Weaker sponsors may also wish to explore the new superfund route, which has significant growth potential. It is crucial that at a time of economic and regulatory change trustees and sponsors are working hand in hand.”
William McGrath, founder of C-Suite Pension Strategies, told IPE that there is an awareness of other solutions being available, but right now, particularly post-pandemic, it’s for the boards of trustees to “get stuck in as they are not really doing enough”.
McGrath said trustees need to analyse the consequences of derisking. “Buyout solutions drive up contributions but they suck money out of DB at the expense of DC contributions,” he said, adding that there are many schemes putting money on DB schemes but not investing in defined contribution (DC).
“Funding schemes to a level that life insurance companies can take them over is taken as the ‘gold standard’ by the pensions industry,” he explained. ”DB schemes should continue so one day they can add to DC funding levels.”
“The call is to run schemes with the future in mind not just the past”
William McGrath, founder of C-Suite Pension Strategies
McGrath believes that pension fund trustees need to set different, more balanced objectives. “A DB scheme’s target can be to “run off” and have more money that is needed to meet established commitments. Steady long term investment gets you there,” he explained.
In the note It’s not fair – Inter-generational resource inbalances in pension provision, authored by McGrath, he wrote: “The call is to run schemes with the future in mind not just the past.”
He said liability-driven investment (LDI) proved a useful tool hedging away liabilities. “Cash flow matching has become vogue so assets mature when liabilities arise. But now it’s cash payment driven investment.”
“Enriching the life insurance market should not be the only way out,” McGrath told IPE.
The full LCP report can be seen here.