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Superfunds: New solutions for Defined Benefit pension plans

Superfunds: New solutions for DB pension plans

Superfunds are closer to becoming a reality, with the first deals already underway. But, what are they and why should you be looking at them?

Tom Seecharan

Director of Pensions and Head of the Pensions Insurance team

KPMG in the UK


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Superfunds: New solutions for DB pension plans - Hedge and Gate

Welcome to the second edition of KPMG’s look at superfunds: New solutions for DB pension plans.

What are superfunds?

Since our last edition back in August 2018 defined benefit (DB) pension plan consolidation has remained a very hot topic in the industry. We’ve also seen a government consultation and guidance from The Pensions Regulator.

Essentially the superfunds involve a third party providing additional risk capital to replace the employer covenant of the sponsor. In principle this parallels a conventional insurance buy-out, but with greater risk, less regulation and at a price that’s more accessible for pension plans and sponsors. For a pension plan where buy-out is out of reach, a superfund could be the next best thing.

The superfund market is still nascent with two providers actively in the market and other products in development. The current providers, The Pension SuperFund and Clara-Pensions, both operate in the existing legal framework for pension plans and aim to undercut insurance pricing by up to 10-15%, depending on the profile of the pension plan. For the average pension plan, which is 70% funded against buy-out, that means the additional premium to move to a superfund could be half the cost of an insurance buy-out.

Should I look at superfunds?

The challenges for superfunds remain, particularly the uncertainty over the financial adequacy requirements and whether that will impact business models and pricing. They are currently undergoing testing and authorisation with The Pensions Regulator, whilst the regulatory environment is still being formalised by government. It is an area that is likely to evolve further as the first superfund transactions happen. The superfunds themselves appear undaunted by this and are expecting to submit clearance applications to The Pensions Regulator on their first transactions by the middle of this year.

We do need to take the superfunds seriously. They fill a significant gap in the market and will appeal to trustees and sponsors who see the benefit of securing/settling their pension obligations, but find that insurance buy-out is out of reach. In the right circumstances superfunds could provide better security at a lower cost than the alternatives, i.e. a win-win for all stakeholders.

They will only be appropriate for a minority of pension plans initially. But any trustee or sponsor looking at long-term strategy should include superfunds in their assessment. Even if a superfund isn’t appropriate in the short-term, they might open up a different journey plan destination for pension plans that otherwise need to take significant risks.

Where do I start?

It is clear to us that the superfunds are ready to go and, we expect, here to stay. Our specialist superfunds team is already working hard to deliver the advice trustees and sponsors need in order to assess the superfund option against the range of alternatives and provide more secure futures for their members.  

For further information on superfunds, the providers in the market and whether you should be looking at a superfund, read our report 'Superfunds: New solutions for DB pension plans' or contact Tom Seecharan, Director of Pensions and Head of the Pensions Insurance team at KPMG in the UK.

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