Clara eyes Q2 transaction after consultation delays clearance

One of two ‘superfund’ pooling vehicles to come to market so far, Clara was in ongoing discussions with more than 40 schemes as far back as October last year.

However, no transaction has yet been finalised, with Mr Saron revealing that the later-than-expected arrival of the Department for Work and Pensions’ consultation, previously described as the “starting gun” for consolidation, set deal completion back.

Speaking at a roundtable hosted by recruitment consultancy BWD, Mr Saron said that “everyone fully expected that at the Pensions and Lifetime Savings Association conference [in October] last year”. In fact, pensions and financial inclusion minister Guy Opperman’s speech only included a commitment to facilitate superfunds, with a full consultation coming in December.

It is preparing for an ultimate authorisation regime and is putting us through the ringer, as it rightly should

Adam Saron, Clara Pensions

That means the target for Clara’s first deal is now within the first half of this year, although Mr Saron added that “if it’s June or July I don’t think we’d really care at the end of the day”.

He said first transfers are likely to involve schemes where cash is available now, but the employer’s situation means future contributions could be hard to come by, making a clear case for exchanging covenant for cash.

Clara, its competitor The Pension Superfund, and the Pensions Regulator have all maintained that there does not need to be a change in the law for consolidation to go ahead. To ensure interim deals can progress, the regulator has asked that superfunds seek clearance, and according to Mr Saron, is taking a very prudent approach.

“There’s absolutely a question about future regulation, but at the same time the regulator made it quite clear that it will let transactions go ahead,” he said.

“It is preparing for an ultimate authorisation regime and is putting us through the ringer, as it rightly should,” he continued. “The earlier transactions are going to be held to a higher standard.”

Other have speculated that the regulator is reluctant to proceed eithout clarity from government. Danny Wilding, partner at Barnett Waddingham, said the regulator's response to the consultation implied "that TPR would not be comfortable giving clearance to transactions until we have a system of formal regulation and approval of superfunds, which could clearly take some time yet."

A spokesperson for the regulator pointed to guidance on how to pass clearance issued in December last year, adding that deals should "further the purpose of paying the accrued scheme benefits".

“We’ve seen how effective the supervision and authorisation framework has been for driving up standards in defined contribution master trusts, and fully expect the same protections to exist for DB superfunds from an early stage in this developing market. We will continue to work with government to build legislation," they added.

Regulator may favour sectionalised approach

Experts have suggested that The Pension Superfund may have a more difficult job in escaping regulatory scrutiny with their business model intact.

The two providers vary considerably: Clara will operate a sectionalised ‘bridge to buyout’ strategy with no interim payouts to capital providers, while The Pension Superfund plans to run a one run-off scheme, with payouts to both investors and members if investment strategies pay off.

The DWP’s consultation on consolidation noted that in a stressed scenario, members of a sectionalised scheme would likely fall into the Pension Protection Fund on a section-by-section basis, rather than all at once.

Simon Kew, head of strategy and relationships in Deloitte’s pensions practice, said this could mean that regulators view The Pension Superfund as having a higher risk to the PPF – if it underperforms its entire liabilities could pass to the lifeboat.

“If something happens in one section it doesn’t then cross-contaminate,” he said. “Where you have everything thrown in one bucket, if something fundamentally goes wrong, let’s say with an investment strategy, then everything goes down.”

Responding, TPSF's CEO Luke Webster said that its governance would reduce the likelihood of falling into the PPF, and that while it might use sectionalisation in specific cases "if there was something particular about the ceding scheme or employer’s situation", the scheme prefers the efficiency of pooling.

"Having one big pool allows the law of large numbers really to work in everyone’s favour whilst allowing us to run an efficient, well-diversified and risk-controlled investment strategy," he said. "Crucially, under our model, members will also share in any upside generated over time, which could mean they are genuinely better off in retirement."

Will traditional advisers block consolidator progress?

Consolidators may also face barriers in the form of vested interests within the wider pensions industry. Transfers into a superfund or defined benefit master trust will mean actuaries, investment consultants and administrators will see their fee revenue under threat.

“We face some issues about, frankly, some vested interests in the industry,” said Adrian Cooper, head of direct distribution at TPT Retirement Solutions, a DB master trust. “Our model will mean people effectively lose their role on schemes.”

However, this dynamic may come to a tipping point when schemes pass full funding and come in sight of consolidation options where the employer can relinquish their responsibility.

Sammy Cooper-Smith, co-head of business development at Rothesay Life, said that of schemes he has come across, “I’m not aware of any who, once they realised they were in surplus, didn’t [buy out]”.

The various consolidators in the market have meanwhile expressed a desire to work together.

Sion Cole, head of distribution for BlackRock’s fiduciary management arm, said the company could “help and participate in all parts of the journey”.

“We can help on the investment strategy and get you to buyout, we can partner with somebody like Clara once you’re in that gap… we can provide investment solutions to the insurance market,” he said.