Is it a bird, is it a plane… no it’s a superfund!
When my son asked me if the latest superfunds guidance I was reading was connected to Superman, I thought this would be a fitting title for a blog! Just like Superman, you need to squint quite hard at the moment to see any sign of superfunds still kicking around. Three years on from the Regulator’s first guidance, we don’t have a legislative regime for superfunds (though it is still promised) and, although one superfund has been given Regulator clearance (Clara), no transactions have completed yet.
Whatever the reason for that might be, I was interested to see that one of the key updates in the Regulator’s guidance was to put a marker down that it is now considering a specific mechanism to enable profit extraction to take place. This is a significant development because it recognises that the current superfund models are businesses and, as such, only viable if they can make money in some way – somewhat akin to the profit margins built into buy-out pricing by insurers.
Clearly security of member benefits will remain paramount but I think it will be important for the development of superfunds that the Regulator considers all perspectives. Otherwise, interest from an investor perspective could wane and this particular option for trustees and employers could disappear altogether.
It’s probably also no coincidence that the updated guidance (with the nod towards allowing profit extraction from superfunds) has come out at the same time as the Mansion House “avalanche” which included a call for evidence on “Options for Defined Benefit schemes”. Amongst other things, the Government is exploring ways in which DB schemes might be “incentivised” to invest in productive assets, such as start-ups and infrastructure, which would have wider economic benefit but come with potentially higher risk for trustees. It is also considering whether the ability to extract / utilise surplus from DB schemes should be extended and whether that would encourage greater investment in these (or other) UK assets.
Whilst both scenarios (profit extraction from a superfund and surplus extraction from a DB scheme) would need extremely careful parameters, we’ve already seen recent examples of trustees and employers considering alternatives to buy-out where there is a scheme surplus, provided that the trustees can be satisfied that the security of member benefits remains robust. It will be very interesting to see how this area develops over the coming months and years.