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Increasing momentum in the DB superfund market raises important questions for scheme endgames

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Pensions & benefits Endgame strategy and journey planning Corporate strategy DB pensions Pension Schemes Bill
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New analysis from LCP suggests that DB superfunds will have a growing role in DB pension scheme endgames.

The completion of the fourth superfund transaction last month by Clara marks an important milestone – achieving proof of concept across all of Clara’s current market offerings and paving the way for greater innovation in the DB endgame space.

LCP believes that the proposed easements to the superfund gateway tests through the Pensions Schemes Bill, combined with greater competition from new DB superfund entrants, will give rise to further momentum in this market as an alternative to insurance for schemes which are underfunded on buy-out. It expands the universe of DB pension schemes eligible for a superfund transfer to potentially half of all schemes, totalling c£600bn of assets.

It will take a couple of years for the Pensions Schemes Bill to be brought into law but schemes could see a material reduction in the timeframe for reaching their endgame via a superfund as compared with the timeframe for insurance. If new superfund entrants lead to increased price competition then that could further reduce timeframes. LCP Head of Consolidation, Laura Amin, highlights many sponsors and trustees will need to decide whether to continue targeting a transfer to insurance by a buy-in or to target a potentially earlier DB superfund transfer.

What endgame option is ultimately right for any given DB scheme will depend on many factors, including the scheme’s funding level and covenant support, alongside trustee and sponsor attitudes to risk and any potential benefits for members or sponsors (eg through sharing of surplus).

LCP Partner and Head of Consolidation, Laura Amin, commented:

“The stars are aligning in the DB superfund market and, with the proposed easements of the gateway tests through the Pensions Schemes Bill, 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.

“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. New entrants will lead to greater competition and choice as well as further innovation in endgame solutions.

“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.”

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