The defined benefit (DB) superfund market is gaining momentum as more schemes begin to consider the model a viable route to endgame, according to consultancy LCP.
The completion of a fourth transaction by Clara Pensions last month marks a key moment for the emerging sector, with the firm having now executed deals across all of its current market offerings. This milestone, LCP argued, paves the way for further innovation and uptake in superfund solutions.
Proposed changes to the regulatory framework, particularly to the so-called gateway tests that govern scheme entry into a superfund, are expected to broaden the market significantly.
Under the Pension Schemes Bill currently progressing through parliament, the gateway tests are likely to be eased, allowing pension funds that are underfunded on a buyout basis – but otherwise well run – to consider a superfund as an alternative.
LCP estimates that around half of all DB schemes, with combined assets of approximately £600bn, could ultimately become eligible for a superfund transfer.
“It will be fascinating to see how this market evolves in the coming 12 to 24 months – we are at a critical point and the completion of Clara’s four superfund transactions to date is just the beginning,” said Laura Amin, partner and head of consolidation at LCP.
Amin said that with regulatory easements and new entrants expected, the market is set for increased competition and innovation.
“We also expect to see DB superfund new entrants join the market, expanding competition beyond just Clara and widening the DB superfund options available for trustees,” she noted.
While a transfer to an insurer via a buy-in remains the most common endgame strategy, LCP argued that for many schemes, especially those with weaker funding levels, a superfund could offer a faster route to endgame.
“The stars are aligning in the DB superfund market […] sponsors and trustees of underfunded schemes are facing an important decision on whether to continue targeting a transfer to insurance or to target a potentially earlier DB superfund transfer,” Amin added.
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