A burgeoning superfund market could be on the cards within three years as defined benefit (DB) scheme trustees and sponsors face myriad legislative, economic, and capacity issues, says Lane Clark & Peacock (LCP).
While DB consolidators are yet to complete their first deals, the consultancy predicted annual volumes could total more than £5bn by 2023 - as long as £1bn of transfers are completed within the next year.
In Leading the Way, the consultancy said that sponsors will need to work more closely with trustees over the coming years, particularly as they seek to avoid falling foul of increasing regulatory and legislative requirements.
Around half of schemes are currently targeting buyout as part of a long-term plan, with 28% of schemes planning to insure benefits by 2022. However, the bulk annuity market will not be able to accommodate this demand, LCP said, meaning schemes will need to wait for longer or consider alternative solutions such as superfunds. Just £165bn of circa £2trn liabilities have been insured since 2007, LCP calculated.
But the superfunds themselves will need to generate momentum and build confidence in the market rapidly to be able to sustain the growth, LCP said. Both Clara and The Pension Superfund will need to establish themselves as a "credible alternative where the buyout ‘gold standard' is unobtainable."
Speaking at a Society of Pension Professionals conference on 15 September, pensions and financial inclusion minster Guy Opperman said Covid-19 had removed any doubt over the necessity of superfunds, and that they could be a "useful weapon" for DB schemes.
Sponsors are already seeking alternative funding arrangements as they grapple with the economic uncertainty from Covid-19 and respond to the growing legislative demands.
LCP found that while a third of sponsors currently utilise contingent funding arrangements, 40% said this would be the case from the scheme's next valuation. This is against a backdrop of 10-15% of sponsors suspending deficit contributions amid the pandemic, sometimes agreeing a method for switching the contributions back on as businesses recovered.
The Pension Schemes Bill is also expected to formalise a need for sponsors to collaborate with trustees to build appropriate investment strategies, both in their design and implementation.
Partner and report author Steven Taylor said: "Sponsors can no longer take a back seat when it comes to pensions. A combination of new funding rules, economic turmoil, and new legislation creating criminal sanctions for ‘getting pensions wrong' mean companies are going to have to be much more proactive when it comes to pensions.
"Sponsors now need to consider an increasing range of options for reaching their designed endgame and to be more active in planning for that destination. Without increased capacity in the de-risking market, sponsors will need to consider alternative options such as agreeing efficient contingent funding arrangements.
"Weaker sponsors may also wish to explore the new superfund route, which has significant growth potential. It is crucial that a time of economic and regulatory change, trustees and sponsors are working hand in hand."
Around £12.6bn of buy-ins and buyouts were completed in the first half of 2020 despite the onset of the Covid-19 pandemic, according to Lane Clark & Peacock (LCP) analysis.
Pension Insurance Corporation (PIC) Group secured £3.5bn of defined benefit (DB) scheme liabilities throughout the first half of the year, although adjusted profits fell by nearly three-quarters.
This year might prove to be a blip in the growth of the bulk annuity market despite volumes trending towards £25bn, according to Mercer.
The Marathon Service (GB) Limited Pension and Life Assurance Scheme has completed a £610m full buy-in with Rothesay Life, covering the benefits of more than 1,400 members.
The Hitachi UK Pension Scheme has agreed and completed a £275m buy-in deal with Legal & General (L&G) covering the remaining benefits in the scheme.