Defined benefit (DB) superfunds will play a growing role in the endgames of DB pension schemes, according to analysis from LCP.

The firm argued that the proposed easements to the superfund gateway tests, through the Pensions Schemes Bill, combined with greater competition from new DB superfund entrants, will give rise to further momentum in this market as an alternative to insurance for schemes that are underfunded for buyout.

Indeed, LCP said the shift would “expand” the universe of DB pension schemes eligible for a superfund transfer to potentially half of all schemes, totalling £600bn of assets.

It noted that while it will take a couple of years for the Pensions Schemes Bill to be brought into law, schemes could see a material reduction in the timeframe for reaching their endgame via a superfund as compared with the timeframe for insurance.

If new superfund entrants lead to increased price competition, then that could further reduce timeframes, LCP added.

Consequently, many sponsors and trustees will need to decide whether to continue targeting a transfer to insurance through a buy-in or to target a potentially earlier DB superfund transfer, suggested Laura Amin, Head of Consolidation at LCP.

“What endgame option is ultimately right for any given DB scheme will depend on many factors, including the scheme’s funding level and covenant support, alongside trustee and sponsor attitudes to risk and any potential benefits for members or sponsors,” she explained.

However, she claimed that “the stars are aligning” in the DB superfund market and, with the proposed easements of the gateway tests through the Pensions Schemes Bill, sponsors and trustees of underfunded schemes are facing an important decision on whether to continue targeting an insurance transfer or to target a potentially earlier DB superfund transfer.

“We also expect to see DB superfund new entrants join the market, expanding competition beyond just Clara and widening the DB superfund options available for trustees,” she continued, highlighting that new entrants will lead to greater competition and choice as well as further innovation in endgame solutions.

“It will be fascinating to see how this market evolves in the coming 12 to 24 months – we are at a critical point and the completion of Clara’s four superfund transactions to date is just the beginning,” she added.

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