Over half of pension professionals think superfunds will become ‘commonplace’

More than half (52 per cent) of pension professionals believe that superfunds will become more commonplace for certain types of UK DB schemes in the future, according to new research from Lincoln Pensions.

Despite this, only 11 per cent of respondents said that they would be willing to be early adopters and 35 per cent thought that it would become a “highly unusual approach applicable to only a very small number of schemes”.

Furthermore, there is some scepticism surrounding the proposed regulatory approach, with only 14 per cent of pension professionals supporting the regulatory approach currently being consulted on.

Commenting, Lincoln Pensions director, Adolfo Aponte said: “While superfund consolidation is not going to be right for everyone, it is clear that pension professionals believe it could be right for a number of schemes, if an appropriate regulatory framework can be put in place.

“It is understandable that uncertainty about regulation hampers the enthusiasm to be a first mover - however, once established, superfund appetite appears to be material.”

Three fifths (60 per cent) believed that superfund regulation should focus in ensuring that superfund covenant is stronger than the employer covenant available to the transferring pension schemes.

Additionally, 46 per cent of respondents said that they could consider consolidation as a potential endgame in the future, in comparison to 40 per cent citing a buyout as their endgame objective and 39 per cent were targeting a ‘low-risk’ basis.

When asked about the potential positives of superfunds, 71 per cent recognised ‘increased security’ as being ‘very important, while 42 per cent saw ‘improved funding with better access to capital’ as being ‘very important’.

Only 21 per cent said that improved governance was a top priority.

Discussing the potential disadvantages, 78 per cent of pension professionals believed the potential ‘failure of the chosen consolidator’ was a top priority, while an ‘uncertain regulatory regime and risk of transaction being challenged in the future’ was recognised as being ‘very important’ by 49 per cent.

Less than half (44 per cent) saw ‘severing the link with the existing/legacy employer’ as ‘very important’.

The Pensions Regulator is expected to introduce a “strict authorisation and regulatory framework” for superfunds”, and 60 per cent of respondents acknowledged that the regulatory framework should ensure the superfund covenant is stronger than the employer covenant available to the transferring pension schemes.

Over a fifth (21 per cent) stated that all superfunds should target the same minimum level of covenant strength which is defined as the capital in excess of the insurance buyout cost, while only 14 per cent of respondents supported a regulatory framework that is based on a given probabilistic measure of success.

Lincoln Pensions CEO, Darren Redmayne added: “Our survey highlights a concern in the pensions industry that stakeholders will place too much emphasis on probability models to answer the hugely complex question regarding whether the covenant of a consolidator is better.

“While such modelling will likely play a role in the ‘covenant test’ for consolidation transactions, Lincoln Pensions’ believe it is only one element of a multi-faceted and complex assessment on whether or not to proceed with a consolidation transaction.”

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