Sears Retail Pension Scheme became the first UK defined benefit (DB) pension scheme to be consolidated into a superfund.
In a move which one pension consultancy claimed was a ‘significant milestone’ for the industry, Clara-Pensions announced it had reached an agreement with the trustees of the Sears scheme.
Clara is the only pension superfund to have so far received clearance from The Pensions Regulator (TPR) to conduct this type of business in the UK.
TPR defines a superfund as: “A vehicle that, upon entry or at some point in the future, allows for the severance or substantial alteration of an employer’s liability towards a DB scheme, or the DB section of a hybrid scheme.”
Clara-Pensions received TPR’s clearance to conduct superfund business back in 2021. So the deal with the £590mn Sears scheme, which has 9,600 members, was a long-awaited one.
Members of the Sears scheme will have their benefits transferred to Clara in what the superfund announced was the start of a “journey to an insured buyout”.
Clara will ringfence an additional £30mn in order to increase the security of members’ benefits as part of the deal, which has been cleared by TPR.
Clara is backed by Sixth Street, which manages around $74bn (£61bn) in assets and employs 500 around the world.
It was set up in 2017 and any schemes it signs up are placed in separate sections of the Clara Pension Trust.
Additional capital from Clara’s investors is injected to create a funding buffer for the schemes it signs up.
Clara’s pool of advisers, partners and non-executive directors includes Lawrence Churchill, chair and the founding chairman of the Pension Protection Fund and Alan Pickering, former Chairman of the National Association of Pension Funds, now known as the Pensions and Lifetime Savings Association (PLSA).
Bridge to buyout?
Super Funds are not an alternative to a fully-funded insurer-led buyout, rather they are aimed at providing a bridge to one.
They do this by acting as both a consolidator and intermediary which brings in external investor capital and expertise to increase the bought out scheme’s funding.
When the scheme becomes fully funded, it can then seek the assumed protection of an insurer buyout.
Trustees for the Sears scheme, said they had been carefully managing the scheme with the aim of securing all members’ benefits with an insurance company through a full buyout in the future.
Clara, via its investment managers and advisers, will work to improve the scheme’s funding, with the £30mn from investors ring-fenced to draw on. This cash will be used as insurance so it can pay out the benefits of members if the returns on the scheme’s assets fall short of its required funding level.
While continuing investment of the Sears pension will be taken over by Clara, Sears trustees confirmed that the administrator Isio will remain in place.
Simon True, CEO of Clara-Pensions, said: “This is a landmark day for Sears’ members, as they become the first members of Clara and will benefit from a day one injection of new, ring-fenced capital of £30m to support their journey to an insurance buyout. Members will be able to take confidence in the improved financial security of their benefits and the commitment and expertise of Clara.”
What it means for clients
The idea of a superfund is that it provides the kind of scale that can protect pension scheme members’ benefits, so a client whose DB scheme is ‘bought’ by a superfund will, on paper, have the security of knowing their pension will be paid out.
True pointed out that an insurance buyout remains the gold standard for any pension scheme member.
He said: “Not all schemes can afford to reach that goal. Clara was created to provide a safe bridge that brings the insurance market into reach for more schemes and their members.”
Superfunds have been sold on their ability to provide security through scale, but this will take a while.
True said there were 10 other deals in the pipeline and it expects to have taken on board a further 30,000 scheme members by the end of 2024, as well as pension assets amounting to an estimated £4bn.
For now Clara remains the only UK pension superfund to have received regulatory approval, and the UK superfund model has, so far, proved too tough for other companies to make it viable.
The Pension SuperFund (PSF) in 2021 tried and failed three times to complete the TPR’s superfund assessment process.
At the time its co-founder, Edi Truell blamed The Pensions Regulator (TPR), government and insurance industry for making his DB superfund business model “uninvestable”.
He said TPR had not produced ‘profit extraction’ guidance on how superfund investment profits could be distributed.
Profit and buyout
Superfunds, like Clara, rely on cash from external investors, who - once the benefits of members have been secured - take their cut through making successful investment decisions.
Extracting this surplus, or profit, will need an act of Parliament to set out how much and how investors can extract their profits.
In September, the TPR signalled a change in its position on profit extraction, although it said it would be consulting further with industry on how this will work to help create a system that worked for both providers and members.
For now Clara’s deal is being welcomed as the start of a new era for pensions which have struggled to become fully funded enough to benefit from the umbrella of an insurance buyout.
Laura Trott, minister for pensions, said: “I am confident the market will continue to grow, freeing up employers to focus on their core business, and assisting in the Government’s push for increased productive investment within the pensions sector.”
Nicola Parish, executive director of frontline regulation at TPR, said superfunds offered increased security, improved governance and better risk management.
TPR has long been pushing for consolidation as a means to securing the pensions of those in defined benefit schemes that were being run on a deficit.
She said: “We want to see fewer, larger, well run pension schemes and are pleased to see the market innovate and consolidate in savers’ interests.”
Government-run superfunds?
As part of the Mansion House reforms announced in July, the Department for Work and Pensions said it was looking at the role of the PPF as a central body that could absorb and consolidate smaller pension schemes.
These would be smaller ‘unloved’ schemes, which as the Mansion House consultation proposed, could bring together the UK’s fragmented pension schemes into one enormous pot.
A pot that may be used to invest in UK companies, another theme of the Mansion House reforms. Earlier this year the Tony Blair Institute published a report urging for the creation of a pension superfund to help revive the UK economy.
The report Investing in the Future: Boosting Savings and Prosperity for the UK pointed out that overseas pensions invest 16 times more in British venture capital and private equity than domestic public and private pensions do.
“Both pensioners and the economy have suffered as a consequence,” the report said. “We need these reforms to benefit pensioners and light a fire under the UK economy.”
Samantha Downes is a freelance financial journalist
