Industry Voice: Alternative risk transfer solutions

If you are involved in the running of a pension scheme, you may be familiar with what a bulk annuity is, or what a longevity swap involves. But are you aware of the new risk transfer products that have entered the market recently?

Recent activity means you will have heard more about Superfunds, Capital Backed Journey Plans or partial insurance, or perhaps organisations such as Clara, The Pensions SuperFund or Portunes, as well as new solutions offered by existing providers, such as Legal & General. But what are these products? And, more importantly, is one of these appropriate for your pension scheme?

Read on to find out about the new de-risking options available, who offers these services, and ways to identify if these may be a suitable alternative risk transfer solution for your scheme.

Superfunds

Superfunds are defined benefit (DB) pension schemes that accept bulk transfers of assets and liabilities from other DB schemes. The link between the scheme and its original corporate sponsor is severed, and support is instead provided via a capital buffer from the superfund's investors.

There are currently two providers - Clara-Pensions, which passed the Pensions Regulator's (TPR) assessment in November 2021, and The Pension SuperFund, which is in the process of being assessed.

What are the benefits?

Superfunds aim to pay members' benefits in full with a high degree of probability. TPR requires them to hold enough reserves so that there is a greater than 99 per cent chance that their assets will cover liabilities in five years' time.
From a sponsor's point of view, their liability towards the DB scheme can be severed at a cheaper cost than buyout
From a trustee's point of view, the sponsor may be open to making an additional one-off cash contribution to support the transaction and, if the current sponsor covenant is weak, transferring to the superfund may increase benefit security for members

What are the limitations?

Benefit security is not expected to be as strong as via bulk annuities
TPR requires a set of ‘Gateway' tests to be passed before a scheme can enter a consolidator:
- The scheme must not be able to afford buyout now, nor within the "foreseeable future" (around three to five years)
- The transfer must improve the likelihood of members receiving full benefits

Are superfunds right for you?

Complete our short interactive checklist to see if superfunds might be a viable option for your scheme.

Capital Backed Journey Plans (CBJPs)

CBJPs involve a third-party providing a capital buffer. This provides risk protection to support your scheme's journey to a pre-agreed funding target, using a pre-agreed investment strategy.

If the CBJP goes to plan, the provider expects to have its capital buffer returned along with a share of the returns in excess of the funding target.

If the funding target is not met, the capital buffer is used to top-up the scheme to the target. The funding target is typically buyout, but some providers offer flexibility to target superfund funding, technical provisions etc.

The term of the product varies significantly by provider (from 5 to 20+ years) as does the buffer amount provided (from around 5 per cent to 30 per cent of liabilities). There are several providers, including Aspinall's Portunes, Legal and General's Insured Self-Sufficiency and Punter Southall's Pension Safeguard Solution.

What are the benefits?

CBJPs provide an additional layer of protection above the sponsor covenant, which covers a broad range of financial and demographic risks
The additional capital can support a higher return strategy, speeding up the time to buyout, or provide additional security on the scheme's journey

What are the limitations?

The downside protection is limited to the agreed amount of capital buffer - the sponsor remains responsible for
tail-risks
Upside potential and control is passed to the provider - some schemes may prefer to put in place a similar investment strategy themselves and rely on the sponsor covenant

As well as Superfunds and CBJPs, there are also partial insurance solutions. Legal & General's Assured Payment Policy offers insurance protection against a scheme's investment and inflation risks, by providing the scheme with a set of agreed monthly cashflows in exchange for a one-off premium.

The wide range of solutions available can be overwhelming for many trustees and companies. The fact that such a range exists, and the extent of flexibility within each solution, means you are now able to target and eliminate the risks that are most important to your specific circumstance. A well-developed strategy will prioritise your reduction of risks and consider the full range of options to manage them.

For further information about alternative risk transfer options, please speak to your usual Aon contact or email [email protected]