The Pensions Regulator is shortly to issue interim regulation covering commercial consolidators, Pensions Expert can reveal.
The move represents a dramatic step forward, which is expected to open up a range of new options for defined benefit schemes looking for an alternative to buyout, or where trustees wish to reduce their reliance on sponsor covenant in getting to the endgame.
Though no specific date has been set, Pensions Expert understands that the new regulations could be published as early as this month, ending the long wait of commercial consolidators such as Clara and The Pension SuperFund, which had previously been reluctant to move forward without official clearance.
A TPR spokesperson said: “DB superfunds and new business models have the potential to offer real benefits for employers and pension savers.
“We are determined that they should meet clear and stringent standards to ensure people’s retirement incomes are protected.”
We are likely to see an explosion in diversity of scheme strategies
Steve Webb, LCP
They continued: “We are working closely with the government to develop a regulatory regime for superfunds. We expect to announce details in the coming weeks; however, we will not comment further at this stage.”
Though Clara and TPSF are the most obvious beneficiaries of the new guidance, they are not the only models expected to be available after its publication, with LCP partner Steve Webb predicting an “explosion of diversity” in the range of options open to DB schemes.
Portunes Capital and Aspinall Capital Partners recently announced a first transaction for a system where investor capital backs a “bridge to buyout” journey plan without separating employer covenant.
Meanwhile, insurance giant Legal & General is developing a similar product under the banner Insured Self-Sufficiency, and transacted on its first assured payment policy – an insurance contract that covers all risks except longevity – with Allied Irish Bank in February.
“Historically, pension schemes have been heading either for a buyout or have planned to run on to meet liabilities as they fall due,” Sir Steve said.
“But in recent years a range of new funding models have come forward, many of which involve new ways of getting external capital involved.”
He added that commercial consolidators have been left in limbo until now as changes were held up by central government, most notably the Treasury and the Prudential Regulation Authority, over concerns that consolidators might prove to be unfair competition for insurance companies in the buyout market.
“The time has now come for the government to make a decision once and for all,” Sir Steve said.
“If the go-ahead is given, we are likely to see an explosion in diversity of scheme strategies. Trustees will start to see a menu of options that they will want to tailor to their specific circumstances.
“The range of funding strategies in the DB world could look very different this time next year.”
The news brings the prospect of an end to a long wait for clarity for commercial consolidators, with the absence of superfund provisions in the pension schemes bill late last year deemed an “egregious waste” of investors’ capital by TPSF chief executive Luke Webster.
The coronavirus crisis – which has harmed sponsoring employers and Pension Protection Fund funding levels – may have been “the trigger to unlock the necessary legal framework”, Sir Steve suggested.
Regulator to issue new guidance on capital-backed endgame deals
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.
This contention is supported by recent research from the PPF, which found that the aggregated deficit of DB schemes had risen by more than a third in a single month, to £176.3bn last month from £128.5bn at the end of April, while the funding ratio decreased to 90.9 per cent from 93.1 per cent over the same period.
Commenting on the impending changes, Richard Williams, director of policy and communications at Clara Pensions, said: “There is a clear need for options to provide safer pensions, especially in the current economic climate.
“Clara’s model gives companies the space to concentrate on their business, safe in the knowledge that their pension scheme members are on a journey to an otherwise unobtainable insured buyout.
“We welcome the continuing engagement we have across government and with TPR. We look forward to regulatory progress that will allow us to work with employers and trustees to undertake our first transactions.”
Meanwhile Frankie Borrell, head of client solutions in the UK PRT business at Legal & General, said: We hope to see guidance that balances access for those pension schemes unable to afford buyout with the need for a robust, risk-adjusted capital framework that protects members’ benefits.
"Even with the Regulator’s framework in place, commercial consolidators are likely to come under intense scrutiny from each trustee board," he added. "The irreversible decision to forego the corporate sponsor’s covenant in exchange for limited third party capital will not be an easy one."
