More than 40 schemes in talks with Clara

Speaking to Pensions Expert, co-founders Kim Toker and Adam Saron said trustees have approached the company looking to ditch what they perceive to be weak sponsors, but said the company would not finalise any deals until the publication of the Department for Work and Pensions’ consultation on superfunds.

We expect the fact that some providers plan to eventually pass the pension obligations to the insurance market to be seen as an attractive feature

Darren Redmayne, Lincoln Pensions

Consolidation has long been talked about as a remedy for the UK’s fractured DB market of 5,588 schemes. However, trustees have proved wary about severing the link to a sponsor in exchange for cash.

Nonetheless, deals do look likely to go ahead. According to Toker and Saron, the company has had ongoing discussions with “north of 40” schemes.

“It has been a lot more successful at this stage than we had imagined,” said Saron, Clara’s CEO, adding that the company had envisaged engaging seriously with just one scheme at this point in its business plan. “There’s no doubt that the white paper has been a massive support for that.”

Clara’s estimated target market accounts for between £100bn to £200bn in liabilities. Toker said the proposition has drawn particular interest from sponsors tired of DB volatility distracting from their main business activities, those undergoing corporate activity, and those with overseas parents.

The fund has also been approached directly by trustees of schemes that are well funded, “but they are actually worried about the sponsor covenant”, Toker said.

Toker and Saron said they are “agnostic” with regard to the size of entrants to the fund, but admitted that in early stages their “sweet spot” is likely to be schemes of between £200m to £400m.

Clara hopes to align members and investors

Clara’s design differs significantly from its only direct competitor, the Pension SuperFund.

Each new section added to the scheme will have to have access to the full capital required for buyout before it is accepted. Half of the funding above the technical provisions will come from the sponsor.

That injection will be matched by private capital and locked up for the duration of the scheme’s journey through the consolidator.

By investing for marginal outperformance over the assets held by an insurer, and the fact that bulk annuity pricing becomes better as members get older, Clara will hope to buy out the scheme at a lower price than quoted upon entry, thereby delivering returns to investors.

Saron and Toker revealed that their initial design for Clara was as a pure run-off vehicle with no insurance end-point, similar to the structure now being brought to market by the Pension SuperFund.

But the pair decided that doing so would create tension between members and investors. Saron said having a known end-point, of between five and 10 years after scheme entry, means investment can be secured without having to promise any payout before members have been secured.

“Having that creates a real duration threshold for us… we have the right sort of capital to back that sort of duration,” he said. By contrast, run-off vehicles would have to return money to investors before the scheme has wound up, he added.

“You would need to offer a return along the way, which they are doing – no criticism of them – but it does create the risk of tension with the members.”

Covenant still key

That safety net could make it easier for trustees to sell the idea of consolidation to members, according to Darren Redmayne, CEO of covenant advisory Lincoln Pensions.

“We expect the fact that some providers plan to eventually pass the pension obligations to the insurance market to be seen as an attractive feature,” he said.

However, he added that this would be only one factor, and that trustees still needed to consider the possibility of a superfund failing.

“The overall acceptability of the transfer to a consolidation provider will be in Lincoln Pension’s view more heavily influenced by the characteristics of their existing employer covenant, relative to the covenant provided by the consolidator.”

Scheme investment in consolidation deals welcomed

Clara is yet to reveal the identity of parties providing financial backing for the project and any initial deals, although it expects to make this announcement in the near future.

The consolidator is also open to the idea of pension funds providing capital backing for its deals, in an opportunity akin to investing in the insurance-related products or providing regulatory capital for banks.

“As an investor it’s the perfect kind of investment for them because it’s long term, it plays to their strengths as an investment and it’s something they understand,” said Saron.

The industry, however, is taking a more cautious approach. Redmayne said that with the rules still being written around consolidators, an investment would require careful due diligence “not least on the counterparty and their business plans”.

Meanwhile Andrew Wauchope, senior investment director at discretionary manager Psigma, said more details would be needed before trustees could make an informed decision.

“With many of these things one has to be slightly concerned about [the idea that] everybody’s a winner. There must be somebody losing out,” he said. “The other thing is that of course low-risk investments are not no-risk investments.”