On the go: UK pension superfunds could encroach on life insurers’ bulk purchase annuity market, as the new consolidation vehicles may present employers with a more affordable alternative, according to Fitch Ratings.
Superfunds, the broad term applied to vehicles that replace the reliance on the sponsoring employers with a capital buffer supplied by external investors, will have to pass a regulatory assessment on financial sustainability and show they are fit, proper, and have adequate systems and processes in place, according to a new interim regime unveiled on June 18.
The vehicles will be allowed to operate with less capital than insurers, which will enable them to offer lower prices to corporates looking to offload their defined benefit pension scheme liabilities, Fitch stated.
The Pensions Regulator’s interim guidance, which will apply until legislation is finalised, targets a one-in-100 risk of failure to pay benefits promised to scheme members in full. This is less stringent than the Solvency II regime for insurers, which is calibrated to a one-in-200 risk of failure, the company added.
Considering that some employers might opt for the most affordable option, the ratings agency stated that the insurers’ transactions most likely to be affected are annuity buy-ins, where pension costs are transferred to an insurer but the pension scheme trustees retain legal and administrative responsibilities.
“Annuity buyouts, where all costs and responsibilities are transferred, should not be affected as schemes capable of achieving a buyout – the gold standard for transferring pension liabilities – should be outside the scope of superfunds,” it added.
Fitch stated, however, that the interim guidance for superfunds includes an important safeguard for scheme members, which also points to superfunds being a pathway to a transfer to the insurance sector.
It said: “Superfunds must not extract any surplus from a scheme or its capital buffer until such time as either the pension liabilities are bought out with an insurer or final payments have been made,” which means consolidators could “become a source of business for insurers”.
Currently, there are two consolidators in the market – Clara-Pensions, designed as a bridge to buyout, and The Pensions SuperFund, which will be the end journey for the participating DB schemes.
The latter announced on Tuesday that it is closer to completing its first deal, since it has achieved official registration as an occupational pension scheme by HM Revenue & Customs.
