LONDON (Reuters) – Britain’s company pension schemes, grappling with ageing former employees and low investment returns, may start to transfer their assets into new so-called superfunds in the coming weeks, according to people involved in the process.
There are around 2 trillion pounds in more than 5,000 UK private defined benefit, or final salary pension schemes. Nearly two-thirds are in deficit, putting a burden on companies looking to strike merger deals or restructure debt.
Although most companies have closed these generous pension schemes to new members, they still need to pay them to long-serving or former employees. Firms with large pension deficits include former nationalised industries such as British Airways and BAE Systems.
The problem is Europe-wide, as people live longer and years of central bank quantitative easing have depressed interest rates, leading to gaps between the fixed sums the pension schemes pay out and the income they receive from their investments.
But through superfunds, Britain has come up with a new way for companies to get those pensions off their books.
The superfunds are designed to consolidate billions of pounds in collective assets from various company schemes, aiming to benefit from economies of scale and manage the money more efficient.
The first deals will be small, but the superfunds are aiming to manage billions of pounds in assets.
The Pension Superfund, founded by industry veteran Edi Truell, and Clara Pensions, whose chief executive is former hedge fund manager Adam Saron, both have deals under review by the Pensions Regulator, the firms said, without naming the company schemes.
The Pension Superfund told Reuters it expected a 10 million pound “seed” deal to launch in the next few weeks.
“The first deal is absolutely tiny, it ticks all of the boxes,” Truell said. “Everybody is trying to make sure we set the right precedent.”
He added that the superfund had drawn interest from pension schemes collectively managing 60 billion pounds.
Clara Pensions told Reuters it had had conversations with more than 60 pension schemes totalling 15 billion pounds in liabilities and it would be “very happy” if its first deal launched in the third quarter.
The deal would total less than 100 million pounds, Saron said.
The Pensions Regulator declined to comment on the proposed deals.
The British government issued proposals last year on improving the pensions landscape, after high-profile cases of employers’ underfunding of pensions, such as following the collapse of department store chain BHS.
It said the superfund model, devised by trade body the Pensions and Lifetime Savings Association, could be a more affordable option than a bulk annuity, where a company transfers pension liabilities to an insurer such as Legal & General or Aviva.
The model is new but has similarities to the Dutch pension system, where individual company pension schemes have been joining bigger, sector-wide schemes. It is also similar to the Pension Protection Fund (PPF), a UK industry-backed lifeboat fund, which manages the pension assets of failing companies.
However critics of the model say it provides less protection for pensioners than a bulk annuity, an insurance policy that guarantees pensions will be paid in full. If a superfund fails, the pension schemes will likely move into the PPF, which can mean a cut in benefits for many scheme members.
Aside from the Pension Superfund and Clara Pensions, up to 10 more firms are or have been considering setting up pension superfunds, according to Joe Dabrowski, head of defined benefit at the Pensions and Lifetime Savings Association.
Several of the potential new players are backed by private equity or other alternative capital, sources said, including Christofferson Robb’s CRC Superfund.
Christofferson Robb, a $4.6 billion U.S. asset manager that specialises in structured credit and alternatives and has a UK entity, is waiting for more regularity clarity before deciding whether to launch, according to a source familiar with the matter.
Simon Willes, executive chairman of Gazelle, an adviser to the CRC Superfund, said a superfund would need to attract around 3-5 billion pounds in British pension assets to be viable.
The industry sources did not name the other possible new entrants.
However there have been no deals yet and many superfunds, employers and trustees would prefer to wait for full details, including how much capital they will have to hold, before they go ahead, industry sources said.
The superfunds are expected to be regulated by the Pensions Regulator, which issued guidelines in December. The watchdog said at the time it would examine any superfunds launching ahead of the expected legislation, to check they were financially sustainable.
A government consultation with industry players and watchdogs early this year, on how the funds will be regulated, drew a critical response from the Bank of England’s Prudential Regulation Authority, which flagged “the risk of arbitrage between regulatory regimes”, as well as from insurers concerned about the threat to their business.
Insurers have to put large amounts of capital behind their bulk annuity deals, making that model around 10-15 percent more expensive than a pensions superfund, industry sources say.
The consultation has made other possible superfunds wary of entering the market, as tougher regulation could make the deals more expensive and wreck their business plans.
Alistair Russell-Smith, partner at consultants Hymans Robertson, said some potential new entrants had “fairly developed proposals”, but were waiting for the outcome of the consultation.
With the British government distracted by Brexit, the timeline is unclear, though Marc Hommel, senior pensions adviser at consultants EY, said the consultation results “could come out any time in the next few months”.
A pensions department spokesman said the government was considering the roughly 60 consultation responses and would issue more information “in due course”.