UK DB superfunds could provide employers with savings of up to 10%

Transferring a defined benefit (DB) pension scheme to a superfund, such as Clara-Pensions, could provide savings of up to 10 per cent for UK employers, according to research by Hymans Robertson.

As reported by our sister title, Pensions Age, its report, A Closer Look at Clara, was updated after Clara became the first DB superfund to complete The Pensions Regulator’s (TPR) assessment.

The report stated that transferring a DB scheme to a superfund gave ‘a clean break’ for employers at a lower cost than buyout.

This translated to a “significant” reduction in the corporate cash injection required, according to Hymans Robertson, which found that if the scheme was 70 per cent funded on buyout, the value of the required cash top-up would fall by 33 per cent.

It also found that a superfund could improve the chance of members receiving their benefits, as it can strengthen and reinforce the path to buyout.

Furthermore, Hymans Robertson noted that a scheme transferring to a superfund distances itself from the sponsor, which removes the risk on the scheme of company insolvency.
Hymans Robertson predicted that scheme demand could outstrip supply “for a period” while Clara seeks to build scale.

It added that early engagement would be crucial to ensure that schemes do not have to wait, with “a number” of transactions expected to be completed in 2022.

“Commercial consolidation is now here, and the market will be transformed as Clara, with its recent authorisation from TPR, begins to open up a new endgame for schemes,” commented Hymans Robertson head of alternative risk, Iain Pearce.

“Research we conducted last year found a stark increase in the number of trustees considering moving to a superfund, with a nearly 50 per cent increase in this option being considered, and we expect this to continue to grow.

“When deciding whether to transfer, trustees need to be confident that members would be more likely to receive their benefits and understand the implications of severing the link to the sponsor as part of the ‘gateway tests’.

“To support these decisions, there is a need to quickly and efficiently build understanding of how alternative risk transfer solutions can help protect members’ benefits. The paper sets out to explain the role superfunds such as Clara can play. For plenty of schemes, an extra buffer using third party funds should be too good an opportunity to be missed.”

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