New Path to Pension Buyouts Emerges in U.K.

Corporate pensions will soon have another way to get their pension obligations off their books. 

The U.K.’s pension regulator has approved the first-ever superannuation fund, Clara-Pensions, paving the way for corporates to consolidate their plans under one umbrella organization and lower the cost of running them. On Tuesday, Clara-Pensions completed the assessment process for defined benefit consolidators, making it the first to hit the milestone in the U.K.  

Clara-Pensions will manage the plans’ assets on behalf of the corporates and pay pensioners. But the ultimate goal is for companies to transfer their pension assets and obligations in what is called a buyout to an insurance company. That could take seven to ten years.

Among other reasons, historically low interest rates have made it more expensive for corporate pension plans to transfer their liabilities — promises to pensioners — to insurance companies. A pension’s liabilities rise as rates fall, requiring corporations to make big contributions — at least potentially — to their plans before an insurance company would agree to a buyout. Superannuation funds are a cheaper option, as they are backed by a cheaper form of capital, private credit investors, and they are not legally obligated to pensioners. Instead, the corporations are still on the hook. Clara-Pensions is backed by reinsurance company Wilton Re and alternate investments firm Sixth Street Partners. 

Clara-Pensions will now be able to bring outside funds’ assets under its management — as long as regulators approve. According to a source familiar with the matter, the firm has a “strong pipeline” of transactions, expecting to finalize its first in the middle of 2022.   

“When a scheme transacts with Clara, its assets and liabilities will be supported by Clara’s patient capital, thus securing a managed journey to the ultimate endgame of an insured buy-out,” according to the company. “Only after Clara has fully secured promised benefits for its members is there any financial return to its capital providers.” 

The results have been mixed when it comes to the benefits from economies of scale under shared pension ventures like the U.K.’s. Research on Dutch pension funds, on which Institutional Investor previously reported, showed that for those funds, actual costs saved after consolidation were negligible.  

But the U.K.’s superannuation fund scheme has much broader goals. Clara-Pensions touted a different benefit of consolidation — safety.  

“This is a strong vote of confidence in both our model and the consolidation idea,” said Lawrence Churchill, chair of Clara-Pensions, in a statement. “It’s good news for pension scheme members, confirming consolidation as a safe way to improve pension outcomes. Clara’s solution allows companies to focus on running their businesses with their pension schemes in safe hands.” 

Clara-Pensions has been in the works since September 2018 when it raised funds from investors. At the time, the organization appointed Alan Pickering, a trustee for many of the country’s pension funds, as its board chair.  

After appointing board members and finding partner businesses to help with actuarial, risk, and other consulting services, Clara-Pensions sought approval from The Pensions Regulator, which works with the U.K.’s Financial Conduct Authority to regulate pension funds.  

The regulator analyzed the fund’s governance structure, systems and processes, financial sustainability mechanisms, staff, and board members, among other factors, before giving Clara-Pensions the go-ahead to start seeking transactions.   

“Clara was founded more than four years ago on the belief that consolidation could make pensions safer and support U.K. businesses,” said Adam Saron, CEO of Clara-Pensions, in a statement. “Today’s confirmation that Clara has completed TPR’s assessment process marks an incredibly important step forward in our journey to provide safer pensions.” 

Clara-Pensions has hired Kempen Capital Management as its fiduciary manager. The organization has also doubled the size of its team ahead of the transactions it expects to complete.