A second "ongoing" model proposed by The Pension SuperFund in London and awaiting regulatory approval, calls for it to pay pension benefits on an ongoing basis, rather than completing a buyout. Pension funds would transfer all assets and liabilities to it.
Both models have investors providing a capital buffer to ensure their own financial health, and The Pensions Regulator sets minimum capital requirements. Clara-Pensions is backed by private capital from global investment firm Sixth Street Partners and reinsurance company Wilton Re Overseas. Details on the Pension SuperFund model, such as how it will operate financially, were not disclosed.
"Clara makes a return from being patient," Mr. Saron said in an email. "Over time we expect the price we would pay for securing members with an insurer to fall — we can wait out that time in a way that the current sponsor and trustee cannot. Alongside some outperformance of our assets against our liabilities, this means when we secure our members, there will be a return on the capital that provides our funded buffer."
In June, Clara-Pensions hired Kempen Capital Management as fiduciary manager to handle manager hiring and ongoing investments.
Mark Austin, head of U.K. for the institutional investor group at Northern Trust Corp.'s asset servicing arm in London with $15.8 trillion under custody and administration, does not see consolidators approaching their investment decisions much differently than a large pension scheme aiming for an eventual buyout. "They are both trying to achieve a target level of funding by taking an appropriate level of risk. The difference comes with the chosen end game. The approach will also be influenced by other factors such as sponsor covenant, scheme maturity and current funding level," he said.
"The bigger the (consolidator's) pool, the more sophisticated they can be. The received view is that a larger pool of assets can start to allocate to a broader range of assets and often to those assets directly, and the larger pool can support more sophisticated in-house investment analysis," Mr. Austin said.
Neither model will be right for all pension funds, consultants caution. The target candidate for a superfund is a well-funded pension fund that could not afford an insurance buyout in the near term, either because of the upfront cost of funding up the plan to make the transfer, the demographics of plan participants, liquidity or other factors.
Plan sponsors will still need permission from The Pensions Regulator to make the transfer, and pension funds likely to reach buyout on their own within five years would not generally be permitted to do so.
Superfunds would compete with insurers by making it less expensive for a pension sponsor to transfer the entire pension fund to them. The cost of going to a consolidator could be 5% to 15% lower, pension analysts say. The sponsor may have to make additional contributions to make the transfer, but the volatility and uncertainty over future contributions and other decisions would be over.
Each pension fund transferred would have to be fully funded according to Clara-Pensions requirements, and sponsors may have to fund some of the capital buffer, but it is still less expensive than a traditional buyout under insurance regulations.
Another selling point for sponsors is that the superfunds can potentially offer a better outcome for participants, whose benefits might otherwise be at risk of reductions if the pension fund was assumed by the PPF.