By Suzanne Vaughan, Senior Director at WTW
This injection of capital resulted in an overall increase in member benefit security, which was the key objective behind the Trustees electing to execute the transaction. This £30m (sourced from Clara’s investors) is ring-fenced and injected immediately, meaning from day one, it will be there to protect the Sears members and only the Sears members. This transaction was concluded with no additional funding being made available from the sponsor, and fully transfers the DB (Defined Benefit) liabilities to Clara-Pensions, meaning the now empty scheme can commence work to wind-up and no further call for funding will be placed on the sponsor.
This transaction was concluded with no additional funding being made available from the sponsor.
What are the implications for corporates?
While the Sears Retail Pension Scheme transaction was a Trustee-led de-risking exercise, the implications of this transaction carry across into the corporate arena as it is very much anticipated that future cases may be equally led and initiated by scheme sponsors looking to work to secure once and for all their DB pension promises, and take de-risking steps to crystalise all future DB pension risk. Superfunds, like insurer buyouts, allow companies to remove DB pension promises from their balance sheets and streamline for broader corporate activities, such as corporate restructuring. However, the cost of a superfund transaction is generally expected to be materially less than the equivalent cost of an insurer buyout, making it an attractive option to consider in the right circumstances.
How can a scheme enter into a superfund?
Before any DB pension scheme can enter into a superfund, it must first satisfy the three gateway principles set out in the current Pensions Regulators Guidance. These being:
The scheme should not view buyout as accessible now.
It has no realistic prospect of buyout in the foreseeable future, given potential sponsor cash contributions and the insolvency risk of the sponsor.
It must improve the likelihood of members receiving full benefits.
Given these gateway tests, we consider that schemes that could consider a superfund would be:
Funded between c90-95% on buyout with uncertain or no covenant; or
Funded between c70-90% on buyout and a sponsor contribution can be made to facilitate superfund entry.
The Sears Retail Pension Scheme found itself in very much the “sweet spot” in terms of funding levels for a transfer to a superfund, reasonably well funded, but too far from buyout to say with any degree of certainty this would be achieved in the future. This, coupled with the fact that for more than two decades, the Company had no trading businesses to support the scheme, left the scheme in a position where there was no doubt all three gateway principles were comfortably met.
As well as leading the transactions advice and project management, WTW also led the liaison with the Pensions Regulator on behalf of the Trustees and Sponsor. This gave unique insights into the clearance process that Trustees and Sponsors of pension schemes need to go through. Our reflections on the clearance process itself suggest that our top tip is to engage early and often with the Regulator and to run an open and collaborative approach. We were also Scheme Actuary, covenant adviser and communications adviser to the transaction.
Key takeaways
So, what were our key takeaways from this market first superfund transaction that are most relevant to Sponsors?
Firstly, it is essential that the team advising has ready and deep access to live bulk annuity insurer pricing, this will allow you to easily fast-track entry to superfund, without the need to circle round seeking quotes from insurers in the market as risk losing a superfund deal that might be in your grasp.
You will want an adviser that has a deep understanding of bulk annuity transactions, as the negotiated “Bulk Transfer Agreement” executed between the Sponsor, Trustees, and Clara is similar to a buy-in contract with an insurer, so a detailed knowledge of the commercials negotiated on insurer transactions is key to good negotiation outcomes, as is knowing the art of the possible with both Clara and The Pensions Regulator (TPR).
Finally, you will want an adviser who has a track record of the oversight needed for such risk transfer deal execution.
So, turning to the wider implications of this transaction, here are my key reflections:
01. Clara, as a superfund, is now real
Undoubtedly this will be seen as a significant step forward, not only by Clara, but for the superfund market. Clara has been awaiting a first mover since they received TPR clearance in November 2021. While this initial transaction will not single-handedly fulfil Clara’s business aspirations, it must represent a significant step forward as they aim to scale their proposition.
02. This transaction raises interesting questions for many trustees and sponsors
It will pave the way for other schemes to follow suit. It opens up another viable de-risking option for schemes where buyout is out of reach. In some cases, the merits of a superfund transaction will be finely balanced against the potential for greater financial support from the sponsor in future. However, in other circumstances, the merits of a superfund transaction will be clearer cut. Engaging early with your transaction advisers can help you explore the full range of de-risking solutions available and consider whether Clara’s proposition is a viable alternative.
03. Will additional investors be attracted to the superfund space?
A range of superfund providers would be a sign of a healthy industry. It would lead to more innovation in the space and provide greater choice for the Trustees and Sponsors considering superfunds, ensuring that they can find the best solution for their members. However, as it stands, it’s a challenging business case to sign off. The barriers to entry may just be too high at this stage and there is still no permanent legislation in place, albeit the noises around it are getting louder. While the Government has trailed that the permanent regime will be directionally well aligned, it’s not clear how well aligned and how the requirements will differ – this includes superfunds ability to extract profit and so the timeline for investors to get a return on their capital.
So, no doubt there will be more to come from Clara and the superfund market across 2024, the only question in my mind is what scale of transactions we will see them executing over the year.
At WTW, we are proud to have led the way with this innovation, and this transaction adds to the catalogue of ‘industry firsts’ for the WTW Transactions Team, including the first collateralised buy-in, the first pension captive, the first longevity swap and the first longevity captive.
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