In a very good overview of superfunds, Jo Cumbo and the FT explain the new option available to the 5000+ employers sponsoring DB schemes on what Guy Opperman calls their spectrum of choice.
Jo makes clear that superfunds are not a choice for all employers as the ability to walk away from long-tail pension liabilities will come with a substantial price tag.
The superfund route may well appeal to companies in industries under pressure from the pandemic, such as retail, hospitality and travel.
Wayne Segers, partner at the XPS Pensions Group consultancy, says that schemes will need to be well-funded for consolidation to be a realistic option.
“It may be that only a few schemes are funded well enough to meet the superfunds’ price, and The Pension Regulator’s minimum requirements,”
Three dynamics created by the pandemic
The Superfunds’ time had come
I suspect that the decision of the Treasury not to block superfunds further and allow tPR to introduce emergency legislation permitting superfunds was taken in a time of the pandemic and prompted by the pandemic. The powerful lobby from insurers, headed by the ABI to operate what the Pensions Minister has called a “close shop” for buy-out, were less compelling to a Government having to compromise elsewhere to keep jobs and businesses alive
For solvent employers , the urgency to buy out has increased
I agree with Wayne that some employers will have to focus on their business and jettison whatever weighs them down. Even at a price to cash in the bank, the pension scheme looks like excess baggage to many executives.
The pool of solvent employers has decreased
Unless there is a substantial change of opinion at the Pensions Regulator, insolvent employers will not be able to avoid insolvency and their scheme going into the PPF, because a less unaffordable option was available. Unaffordable is unaffordable.
The impact of COVID-19 on superfunds
So I think the pandemic has put electricity through Frankenstein’s monster. Superfunds needed energizing and the shock of the pandemic has benefited them.
It will have changed the prospect lists of Clara and Superfund with some companies hoving into view and some slipping away and towards the PPF.
For a few brave sponsors , the Bowles amendment may allow some schemes to continue to accrue or at least run off liabilities over time.
The direction of travel is obvious, most of the 5000+ occupational DB schemes are heading either to insured or superfund buy-out and COVID-19 looks like speeding that process up.
The winners are on the buy-out side, the losers are those who currently manage small pension schemes. But don’t expect to see a mass migration to buy-out. Most small schemes are in no fit state , in terms of funding, sponsor covenant or quality of data, to dispose of their liabilities anytime soon.
Perhaps the biggest threat to those servicing the small schemes is that superfunds and insurers will put schemes into a kind of pre-buy-out receivership where they can incubate buy-out and shut out advisers.
This is not something you are likely to hear much about in the press but I suspect it is the kind of conversations being initiated where pragmatism is turning to desperation.