The Pensions Regulator is to issue new guidance on defined benefit employers seeking to use third-party investors to back the cost of buyout, following the completion of a first-of-a-kind deal without the need for regulatory clearance last week.
The scheme that was party to the transaction – which is subject to a confidentiality agreement and cannot be named – is now on a so-called “capital-backed journey plan”, an agreement that enshrines at the outset a fixed cost to the sponsor, as well as a future date for the full buyout of benefits. Unlike ‘bridge to buyout’ consolidator Clara Pensions, the link to the sponsoring employer is not cut.
“The structure introduces a capital buffer to protect benefits that is in addition to the sponsor covenant,” said Michael O'Connor, founder and chief investment officer at Aspinall Capital Partners, which led the transaction on behalf of Portunes Capital.
We are considering very carefully these new business models, which we need to ensure are in the best interests of the pension scheme members and beneficiaries
The Pensions Regulator
The assets are then invested to target the cost of buyout at the agreed future date and provide a suitable return on capital, the company explained, adding: “Interest rate and inflation-related risks are hedged out in full during the period and the scheme draws down cash from the structure as needed to pay benefits, until the buyout takes place.”
Mr O’Connor said: “We are delighted to have been able to reach agreement with the trustee and sponsor on this innovative transaction. The capital-backed journey plan concept will, I’m sure, also be of interest to many other schemes and sponsors.
“The solution, being essentially an investment solution, did not require clearance,” he explained.
“The regulator has asked to be made aware of innovation in the DB pensions market, and we presented the capital-backed journey plan to them last month.”
Regulator will issue guidance
Commenting on the new deal, a spokesperson for the regulator said: “TPR welcomes innovation in the market place. However, we are considering very carefully these new business models, which we need to ensure are in the best interests of the pension scheme members and beneficiaries.
“We are keen to engage with all new models such as these and expect trustees to contact us at an early stage.”
The spokesperson added that TPR “will be looking to publish guidance on this developing area”.
Superfund delays are ‘egregious waste’ of investors’ capital
The chief executive of The Pension SuperFund has hit out at the government over its failure to agree a regulatory framework for defined benefit consolidation, despite ministers having encouraged the creation of the sector in the first place.
The implications of this deal for superfunds and commercial consolidators are as yet unclear, as many specifics are shielded by the confidentiality agreement.
As reported in Pensions Expert late last year, the lack of superfund provisions in the pension schemes bill caused consternation among some parties, with Luke Webster, chief executive of The Pension SuperFund, branding government indecision an “egregious waste” of investors’ capital.
While consolidators do not require a change in the law in order to separate schemes from their sponsors, it is thought they would be reluctant to proceed without the ability to point to specific regulatory standards providing assurance that risk to scheme members had been adequately mitigated.
