Do pension superfunds have super powers?

Do pension superfunds have super-powers?

The phrase “pension superfund” has been hijacked by the Tony Blair Institute to mean a not for profit investment fund that swallows up pension money from DB , DC from the PPF and maybe the tax-payer (if it wants to relieve us of unfunded public sector pension liabilities). It’s also used of Nicholas Lyons proposed £50bn UK Future Growth fund, which is more likely to get off the ground.

But waiting in the wings are two actual Superfunds, which could and should be doing the work that Tony Blair and Nicholas Lyons want doing. Both could be investing in real assets to provide people with pension payments today and well into the future.

The Pension Superfund is the more ambitious of the two , Clara has less ambition and is the first to have got approval from the Pensions Regulator. Clara is not quite the long term investor that the Pension Superfund intends to be, which is why it may have got its approval. However it has yet to announce any clients and as the HSBC master trust has shown, no clients – no future.

The Pension Superfund hasn’t got any clients because it hasn’t got approval but it is applying again and at a time when pension schemes are being encouraged to take on more risk, it offers many of the features that Blair, Lyons and Jeremy Clarke look for. I am sure its founder Edi Truell wouldn’t mind his superfund being characterised as having “super powers”.

What are these super powers?

The Pension Superfund is just an occupational pension fund able to take on other schemes assets and liabilities because it has a contingent asset  that can be sold if the fund gets into trouble. That asset is valued as the way of keeping PSF out of the PPF if anything major goes wrong.

Its superpower is its capacity to invest in growth assets and harvest returns that other long -term consolidators can’t. Insurance companies cannot invest DB assets in the way that Jeremy, Nicholas and Tony would like because of the solvency regulations that prevent them. The first superpower that the Pension Superfund has, is the power to invest into wider and more lucrative markets than insurance companies.

The second superpower it has , is that it can offer more for less. If that sounds too good to be true, let me explain. The cost of offloading your liabilities and assets into Pension Superfund (or Clara) is likely to be less than offloading them to an insurer. That’s because investing in real assets – is likely to give higher returns than investing the way insurance companies have to. So buying out through a superfund is cheaper and that means more upside. There is of course some downside with taking investment rich but that is compensated for by the contingent asset which can be sold if needs be.

The third superpower the Pension Superfund has, is to invest in amazing things which might otherwise not get funded. Things like a pipeline being built to bring thermal energy from Iceland to Scotland. Insurers can invest to a limited extent into infrastructure, but not to the degree of Superfunds. Superfunds have the capacity to be a source for good

What to do with surplus money?

Not so long ago , people laughed at the phrase “scheme surplus” – saying that such a concept was a “last-century thing”. But there are now schemes that have serious surpluses worried about what to do with them. The worry is that surpluses are trapped if kept within the scheme or lost if the scheme is transferred to an insurer.

The Superfund can operate using a formula to share the surplus with the superfund getting some of the upside (while providing a floor to the downside). This means that members can feel assured of getting 100% preservation of promised benefits with the option of more – if assets continue to exceed liabilities. (there’s an interesting discussion on surpluses in the LCP webinar – advertised at the end of this blog).

Will these Superpowers be deployed?

We have to wait and see. The DWP consulted on setting up pension superfunds in 2018 and has yet to formally respond to its consultation. Superfunds can be set up on some interim approval basis but the Pensions Regulator is nervous.

It is nervous because the Prudential Regulatory Authority are nervous (and perhaps because TPR is naturally nervous). The PRA are worried that pension superfunds will undercut insurance companies offering better prices because of less onerous regulation (a process called regulatory arbitrage).

That has meant that Pension Superfund keeps on knocking without the door opening. But that may change.

All this noise about superfunds from Nicholas Lyons, Tony Blair and voices inside Government may means that what has been a “no” and “come back later” could now be a “yes” and “what are you waiting for?”.

I hope that we will see the Pension Superfund approved before much longer and to see both it and Clara taking on and investing the assets of pension schemes contracting with them- this year!

Why not?

A lot of people, Tony Blair is one of them, would like to see pension superfunds set up as “not for profits”, meaning that while the management can get paid what they like, there is no shareholder to take dividends and increase price and risk.

I’ve never bought mutuality as a good model. I can see arguments for a not for profit PPF acting as a long-stop, but not for a competitive superfund competing against insurers.

We need the same entrepreneurial zeal from pension superfunds as we do from the companies they could be investing in. That’s not going to come from a “not for profit” mentality – though it could use not-for-profits investments to get returns.

Oc course, Pension Superfund’s rivals would be happy for it never to be approved, they fear the impact its presence would have on its volumes and margins and they could and should lobby against any change that restricts their unfettered freedom to choose which schemes to buy-out.

But just because the ABI is a powerful lobbyist , doesn’t mean that Clara and Pension Superfund can’t eat some of its lunch, and with the capacity of insurers to meet the demands of those buying out , limited – the arrival of new kids on the block should be welcomed by potential customers and regulators alike,

What’s changed?

I sense a spring in the step of the people I talk to in superfunds and it’s there because they see the attitude of Government changing. And more importantly, schemes now feel they are in charge of their own decisions – not in the grip of a deficit and the Regulator.

It’s not just Government pushing for change, it’s the progressive parts of the industry.

You can hear what LCP think has changed (and why) and you can listen and watch their webinar from the link below.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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