Superfunds are increasingly being considered as an endgame option by defined benefit (DB) trustees, but regulatory oversight and first-mover concerns could hinder their growth, according to research from TPT Retirement Solutions.
The report, which was published today, found that superfunds had moved to the top of DB trustees’ endgame shortlists, with 57% of those surveyed currently considering consolidation into a superfund.
Superfunds were the most commonly selected option when trustees were asked which endgames they were considering, ahead of capital-backed journey plans, which were being considered by 50% of respondents.
Other options included buyout at 43%, consolidation into a DB master trust or multi-trust at 41%, and run on at 28%.
TPT acknowledged that consideration does not necessarily translate into future transactions, but said the findings suggested superfunds were becoming a more established part of the range of endgame choices being evaluated by trustees.
However, barriers remain. Trustees most commonly cited scheme funding readiness (30%), followed by an understanding of downside protections (26%), regulatory certainty and adviser confidence (both 25%).
Steve Collins, head of superfund at TPT, said: “Although consideration should not be taken as an indication of future transaction volumes, it does show that superfunds are no longer a niche consideration. They are firmly part of mainstream endgame discussions and being evaluated alongside previously established options.”
“That shift reflects the strength of innovation in the UK pensions market and the greater choice now available to schemes,” Collins continued.
“For trustees, the challenge now is ensuring that evaluation takes place early enough to understand where superfunds may fit within their endgame strategy, thereby preserving flexibility as key strategic decisions are made.”
Lack of confidence
A TPT roundtable ahead of the report’s launch, attended by company staff, pensions consultants and professional trustees, explored some of these barriers in more detail.
One challenge raised was trustees’ lack of confidence in the regulatory regime.
Insurance has long been regarded as the ‘gold standard’ for DB endgames, with the regime overseen by the Prudential Regulation Authority. Trustees now need to understand how the superfund regime compares with the established insurance framework and the oversight provided by the Pensions Regulator (TPR).
Richard Wellard, a partner and risk transfer specialist at Hymans Robertson, said this was a “quite complex question” because of the difficulty in comparing the two security arrangements, adding that it “takes time for someone to understand that as well”.
He also pointed to the lack of a long track record in terms of TPR’s oversight of the superfund regime.
“The regime has changed; it’s currently going through a change,” Wellard said. “There’s a risk that the entire superfund market is tarred with the same brush if there is a superfund that does have a bad reputation in any aspect.”
“It’s going to undermine the confidence of stakeholders in TPR to oversee that regime as a whole,” he added.
Laura Amin, partner and head of DB pensions at LCP, said there is a “lack of understanding” of how the regime is set, and how it is different to the Solvency II framework.
TPR has been encouraging trustees to consider all available endgame options in its recent communications, including superfunds. However, while the regulator is becoming more confident in the superfund market, and being more openly supportive of it as an endgame option, “there’s still going to be nervousness around being the first movers in this market”, according to Jack Sharman, partner and head of DB superfund at Barnett Waddingham.
Sharman said the market was now confident with Clara-Pensions, a bridge-to-buyout superfund, which had completed seven deals, but said new providers would have to “overcome the same hurdles that Clara had to go through over the last few years”.
He said it was also important for new superfunds to establish scale relatively quickly. “It is vital that any superfund achieves scale relatively quickly to demonstrate that they’re here for the long term.”
However, Sharman also suggested that the clearance process itself was becoming more easily navigable for those with experience.
“I think we’re going to have to get used to working through clearance,” he said. “I think those of us who have been through that process, it is possible to navigate that. It is possible to have sensible conversations with TPR.”
Sharman also expects there to be a nervousness around being the first mover. He noted that until new entrants establish themselves, trustees may still be asking: “Do I really want to be the first to take the lead?”
He also expects that not every prospective superfund will have a successful launch. “I think there will be some wastage from the new entrants in the market – and some of these models won’t get off the ground.”
