Defined Benefit  

What you need to know about DB superfunds

  • Identify the role of consolidators in the market.
  • List the features of the regulatory framework.
  • Describe how much appetite there is for the new schemes and why.

The regulator committed itself in its White Paper to raising awareness of solutions already available in the market and to help create the right environment to develop new ones.

This has led to the launch of new consolidation vehicles, such as superfunds.

You could be forgiven for thinking these offer the only game in town, based on the column inches dedicated to this new breed.

However, they still await the green light because there is no existing regulatory framework for their business model.

They claim to offer a more affordable route to removing employer liability risk than an insured buy-out.

In one model, the scheme makes a bulk transfer to the provider, which then operates it as a section of a single pension fund.

The consolidator runs the schemes for a period of years, during which time the assets are worked hard as part of a far larger pool, before the schemes are presented to an insurer for buy-out.

These new entrants have yet to prove their business model, but there is an established alternative with decades’ long pedigree - master trusts.

The model is proven and the best master trust solutions offer a comprehensive service package, covering trusteeship, actuarial, investment and legal services, administration, scheme accounting, covenant assessment and member communications, all under one roof. 

The reality is that, for many small to medium-sized schemes, the upfront costs of buy-out puts the option beyond their reach – but a master trust solution delivers comparable benefits at a more accessible cost point.

Put simply, trustees owe it to their members to consider the suite of options available on the market to ensure the long-term security of their scheme.

Master trusts offer this security and should be a serious consideration for those looking to consolidate – a sentiment echoed by the government in numerous recent publications.

The asset pooling offered by a master trust deserves particular attention – larger pools offer access to asset classes that most stand-alone schemes simply would not be able to access, in turn reducing volatility while offering access to sophisticated tools and techniques to minimise interest rate and inflation risk.

In addition, when DB schemes consolidate into a DB master trust, they have their own ring-fenced section within the arrangement, maintaining their own scheme-specific funding and investment strategy, while benefiting from the aforementioned economies of scale.

A mixed response

The jury is out as to how effective new consolidator businesses will be and the size of the premium applied to the assets to secure a transfer to a new scheme sponsor.

They are also not without risk.


Questions appear on the last page of this article.