Clara announces superfund deal with Church Mission Society Pension Scheme

The deal marks Clara's fourth transaction and is the first to make use of a "connected covenant" structure and the first involving a not-for-profit employer, something the superfund said "demonstrated the broad appeal of consolidation".

Under the agreement, 730 members of the scheme and £55m in assets will transfer to Clara's management. Scheme members will continue to receive their full pension entitlements, with the transaction backed by financial contributions from both the Church Mission Society and Clara.

The connected covenant structure feature of the deal will allow a continuing contingent guarantee from the original sponsor – in this case, CMS – alongside Clara's capital commitment.

Clara said this element of the deal would provide an additional layer of long-term security for members, strengthening the financial safeguards in place as the scheme progresses towards an insured buyout – noting that it believed there was "strong interest" in this model, with the potential for up to £50bn of schemes in the UK to increase their security in this way.

Clara Pensions chief transactions officer Matt Wilmington said: "This marks Clara's fourth transaction and a landmark for the not-for-profit sector. We're proud to support the Church Mission Society in securing the long-term future of its members' pensions, while enabling the organisation to refocus on its core charitable purpose. This transfer is not only the first involving a charity, but also the first to use a connected covenant structure – an important new layer of protection for members. With a strong and growing pipeline that includes several other charitable schemes, we are proving that Clara is accessible to all types of sponsors, regardless of sector."

Church Mission Society Pension Scheme chair of trustees Richard Hubbard, who is a professional trustee at Capital Cranfield, added: "This is really good news for our members. As trustees we are focused on our duty to ensure pensions are paid, and this transaction means our members' pensions are more secure. The new arrangement benefits from significant financial commitments from both CMS and Clara, in addition to the connected covenant which means our members retain the long-term protection of our existing security package. With the Clara trustee taking over our responsibilities in a seamless manner, we are confident our members are in good hands."

Church Mission Society chief executive Alastair Bateman said: "The Church Mission Society is deeply committed to the wellbeing of our employees past, present and future and so I, and the rest of the senior leadership team, are pleased to be able to take this important step towards ensuring the security of our mission partner and staff pensions."

The deal follows Clara's transaction with the £590m Sears Retail Pension Scheme in November 2023; its Pension Protection Fund+ deal with the £600m Debenhams Retirement Scheme in March last year; and its active sponsor transaction with the £210m Wates Pension Fund in December.

Clara, which is backed by Sixth Street, was advised by law firm Cameron McKenna Nabarro Olswang and was supported in its due diligence by Heywood Pensions Technologies. The Clara trustee is supported by Hymans Robertson; Van Lanschot Kempen; and Eversheds Sutherland.

Hymans Robertson led the advice to the Church Mission Society, which also received legal advice from Gunnercooke, led by partner Parminder Latimer. The trustee of the scheme was advised by Barnett Waddingham and Burges Salmon's pensions team, led by partner Clive Pugh, senior associate Jack Gillions and solicitor Serena Kutty.

Commenting on the deal, Barnett Waddingham principal and senior risk transfer consultant Jack Sharman said: "The Church Mission Society scheme is a longstanding client of BW, and we have worked collaboratively with the trustee and sponsor over many years to improve the scheme's security.  It's therefore extremely pleasing to have completed this journey by putting members on a clear path towards a full buyout.

"We're particularly proud to have demonstrated that superfund transactions can be accessed even by smaller schemes in the not-for-profit sector, which can face unique challenges. This, together with the innovative new covenant structure for this transaction, means that it is an exciting time to find new solutions in the pension risk transfer space."

Van Lanschot Kempen Investment Management UK chief executive Andre Keijsers added: "Marking the industry's very first use of a connected covenant structure, Clara has provided yet another solution that works to fill a key gap in the market for schemes with strong sponsors that are well-funded, while also showcasing the broadening role superfunds can play within the UK pensions market endgame environment."

The Pensions Regulator also commented on the transaction. A spokesman said: "We have recently cleared the fourth transfer to a superfund. No two transfers have been the same which demonstrates how we are flexible in our support of innovation in this growing market. We continue to work constructively with trustees and employers looking to transfer their DB scheme to a superfund."

Connected covenant the ‘best of both worlds'

The innovative "connected covenant" structure used as part of the deal means the capital protection from Clara is in addition to the security the scheme already has from the Church Mission Society – meaning the structure is "covenant enhancing, rather than covenant replacing", something Hymans Robertson said was a "breakthrough" in the superfund market.

Hymans Robertson partner and risk transfer specialist Richard Wellard said the fact that members can get the benefit of the additional protection from Clara while still having the covenant protection from their sponsor means that trustees will be able to become more comfortable with the move to a superfund.

Wellard explained that, while the trustees of a scheme might agree that a superfund transaction makes a lot of sense, they can also be concerned about what they are giving up as a pension scheme, particularly when it comes to the sponsor covenant.

He explained: "That can be quite a challenging question for trustees, and it can be quite difficult to confidently determine that you're moving to a better place. What the connected covenant enables, is that the trustees effectively don't have to make that decision… They could have the best of both worlds."

Wellard added: "In those scenarios where the transaction makes a lot of economic sense and is a very secure pathway, but the decision between existing covenant and new covenant is very difficult, this is a really helpful route."

Clara chief executive Simon True said this connected covenant structure didn't have a pricing impact as Clara would continue to provide its usual "bridge to buyout" but with additional protection for members.

True said: "In the very remote scenario – and this is less than a 1% probability – where Clara's capital has been used up and we can't get the scheme back to where it needs to be, the sponsor will step back in and provide some additional funding for members. It's a further safety net for the members beyond the conventional Clara structure."

Charitable benefits

Clara's deal also marked its first with the not-for-profit sector – a segment that Clara believes will grow noting that there were currently around £10bn of unsecured defined benefit (DB) liabilities in the wider charitable sector, reflecting the potential of consolidation as a viable route for not-for-profits seeking to secure pension obligations while prioritising their charitable work.

True said: "When every penny of your expenditure is under scrutiny, and you're very much focused on getting those contributions to the charitable cause, anything you save on your pension scheme is hugely valuable."

He said Clara's entry price point was lower than buyout by definition – meaning it could demonstrate that it creates value for schemes – and added that, having now completed one deal in the not-for-profit space, may encourage other charities to make a similar move.

True explained: "We found in our other transactions that when people see an example in an adjacent space, when an adjacent organisation does it, it becomes a bit more resonant for them. Off the back of the Wates transaction, there were people in the construction industry who became much more attuned to the opportunity because they were following Wates very closely. And I expect the same to happen here in the not-for-profit sector."

Smaller deals

Another innovation in this deal was its size – with the Church Mission Society transaction, at just 730 members and £55m of assets being Clara's smallest to date.

Clara says it believes consolidation can bring a lot of benefits to smaller schemes – including improved governance, access to better investment expertise and lower fees – but says completing such deals in the past has been quite difficult because of the fixed costs involved.

But True explained Clara was scaling up as quickly as it could to enable to share the benefits of scale – noting it was "very open-minded" about doing deals with smaller schemes.

He said: "To do that, we're going to have to be very streamlined in our processes. And obviously now this being transaction number four, we're learning every time. We've learned an awful lot from this transaction, and we can hope, certainly further down the line, to be having a much more vanilla process. That means that schemes can come into Clara at a relatively low cost and relatively quickly, so that we can all benefit from that."

Hymans Robertson's Wellard agreed: "The fact this is the fourth transaction with Clara and the fact that the underlying process is much more established means that parties are much more familiar with what needs to happen and that it was possible to run this transaction in a much more streamlined way."

Superfund legislation

The Church Mission Society deal comes after the Pension Schemes Bill was laid in parliament earlier this month – a bill that will, among other things, sets out the formal legislative framework under which DB superfunds will operate from 2028, after five years operating under interim guidance issued by the Pensions Regulator.

True said he was pleased a robust framework was now being set out – saying this framework would demonstrate government support for superfunds.

But he said it remained to be seen whether the this would be enough to encourage new entrants – and whether changing things like the gateway principles into onboarding principles goes far enough.

He said: "It is for others to decide whether the government has gone far enough to encourage new investment, which ultimately it has to do for us to have a thriving superfund market. To deliver the benefits of consolidation to millions of members, you are going to need new entrants into to the market."

Hymans Robertson's Wellard agreed it would be good to see the superfund market grow.

He said: "We've now seen four transactions with Clara, and each one of those transactions has delivered a better outcome for the members and a better outcome, where there is a sponsor, for the sponsor. Each of those each of those solutions would not have been available without the introduction of the superfund market.

"So, I think it would be good to see, to see that market grow. I think there'll be more exploration of scenarios where Clara or another superfund could provide a really good outcome for both the members and sponsors, and I think we probably just will see more and more examples of these sort of transactions over the next few years."