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By Carolyn Cohn
LONDON, Nov 13 (Reuters) - Alternative investment firms and
consultants are finding ways to boost the finances of Britain's
deficit-laden final salary pension schemes as the two trillion
pound ($2.64 trillion) sector grapples with the fallout from the
coronavirus pandemic.
Many of these defined benefit pension (DB) schemes are
closed to new members, but more than one million private-sector
workers are still paying into them, including thousands from the
country's biggest companies.
The Pension Protection Fund calculates such schemes had an
aggregate deficit of 168 billion pounds at the end of October,
and The Pensions Regulator this week warned pension trustees to
be alert for "employer distress or insolvency" as a result of
the pandemic.
Almost two-thirds of listed UK companies with DB schemes
issued a profit warning in the first nine months of 2020,
according to EY, while the pensions watchdog says 3-4% have
delayed payments to repair deficits - media firms ITV
and Reach have said they are among them.
Managing a pension scheme is costly and can limit companies'
ability to carry out M&A deals, with the current uncertainty
creating an opportunity for industry specialists to provide
capital or services in exchange for longer-term investment
returns or management fees.
"Looking after a DB scheme has nothing to do with your
business, it's financially draining," said Sean Gilfeather,
strategic partnerships director at TPT Retirement Solutions.
"Employers are looking for alternative solutions."
Investment firm Aspinall Capital Partners has injected
capital to support an unnamed UK pension scheme and is hoping to
agree terms on two more deals by the end of the year, with a
possible further two in the first quarter, CIO Michael O'Connor
told Reuters.
O'Connor said the aim is to pay members' benefits and recoup
a profit on its investment strategy after five or six years,
adding that he thought the initial deal was the first of its
kind.
Consultancy Mercer recently expanded its so-called defined
benefit master trust to more services and industry sectors. DB
master trusts take over the investment management and
administration of company pension schemes, aiming to save costs
by using economies of scale while earning a fee for doing so.
Mercer's rival Punter Southall has just launched a similar
vehicle, with its own pension fund as its first client, while
insurer Legal & General has added to its existing
business of bulk annuities – which involve an insurer taking
over a company pension scheme – with a couple of cheaper
alternative products.
Through one of the products, it has taken on the investment
risk of part of Allied Irish Bank's pension scheme.
Executives at Mercer, Punter Southall and Legal & General
told Reuters they were in talks with prospective clients and
hoped to sign up more pension schemes next year, if not before.
Gilfeather at TPT, a long-established not-for-profit DB
master trust, also said it was in discussions with "over 100
schemes and several multi-employer schemes".
GOLD STANDARD
The traditional bulk annuity market remains the gold
standard in terms of providing security for DB pension scheme
members, said Adam Davis, managing director of consultants K3
Advisory.
Companies buy them to guarantee members' benefits will be
paid in full by safe-as-houses insurers. Unlike other products
currently on offer, the insurer takes over and the employer is
no longer linked to the pension scheme.
Bulk annuity deals hit a record high above 40 billion pounds
last year, but many pension schemes balk at the cost, helping to
explain the demand for other options.
Aspinall and others have been able to steal a march on
pension superfunds, yet another structure, which have been
waiting to get regulatory clearance for the past couple of
years.
Superfunds pool pension schemes together and are considered
to be a cheaper option, although offer fewer benefit-payment
guarantees than a bulk annuity.
Insurers such as Pension Insurance Corporation, which are
regulated by the Bank of England, have said superfunds should
not come under the pensions regulatory regime, but David Fairs,
an executive director at The Pensions Regulator, told a recent
conference the watchdog was assessing them "very rigorously".
Two superfunds awaiting clearance - Clara-Pensions and The
Pensions Superfund - have backing from alternative capital and
plan to use economies of scale to manage schemes more
effectively.
Adam Saron, CEO of Clara-Pensions, said the firm was talking
to potential clients who could no longer afford a bulk annuity
due to the impact of the pandemic.
The Pension Superfund's pipeline was "fuller than ever" due
to the uncertainty caused by COVID-19, a spokesperson said by
email.
($1 = 0.7580 pounds)
(Reporting by Carolyn Cohn; Editing by Kirsten Donovan)
