Clara-Pensions is planning to announce its first transaction in the third quarter of this year, as founder and outgoing chief executive Adam Saron details the types of pension schemes that are likely to find value in the defined benefit consolidator’s business model.
Completing the Pensions Regulator’s assessment process was a milestone for Clara, as it became the first DB pension scheme consolidator to pass the regulator’s scrutiny.
At the time of writing, The Pension SuperFund — another provider in the DB consolidation market — is still waiting for the regulator’s decision on its future.
At its heart, Clara is a pension scheme with a commercial element. Saron tells MandateWire: “Making sure there is the right balance between these business functions so the member is always protected was a unique process.”
Rather than just talking about doing deals we can start to execute them
Adam Saron, Clara-Pensions
While TPR’s assessment process was “lengthy and rigorous”, and something the consolidator had been working towards for a long time, Saron says Clara is now looking forward to engaging in transactions.
“Rather than just talking about doing deals we can start to execute them,” he says.
Bridge to buyout
The purpose of Clara is to consolidate smaller DB pension schemes’ assets and liabilities. Grouping these schemes together creates economies of scale, which in turn should enable pension funds to achieve a buyout more rapidly.
Schemes are not, however, simply lumped together in one pot. Instead, their assets and liabilities are managed in individual sections.
Sections represent ceding schemes. The assets and liabilities transferred into the Clara Pension Trust by a ceding scheme become a standalone section within Clara.
“Clara doesn’t make any profit until each section has achieved buyout,” Saron explains.
The idea is to help pension funds create the characteristics buyout providers are looking for. This is because “insurance companies want well-organised transactions, which have sufficient scale and can be implemented at the right time”, he says.
Each transaction will also have to be cleared by the regulator.
Option for weak sponsors
Schemes that are considered a good fit for Clara’s consolidation option have certain characteristics. For instance, a well-funded scheme with a weak sponsor or “one that dwarfs the size of its sponsor” could benefit from Clara’s offering, Saron says.
Schemes that have entered the Pension Protection Fund because their sponsor collapsed but are in sufficiently good shape to be able to exit the PPF are also potential candidates.
Another source is corporate restructurings.
“A company might be a [merger and acquisition] target and thinks it can get a better price if it can spin off the pension scheme,” Saron says.
The acquiring company might also be reluctant to purchase the company if the scheme remains attached. This is a particular issue for companies that are asset-heavy but have relatively low cash flows — a supermarket retailer with a large property portfolio, for example.
“This company might not be able to improve the pension scheme funding unless the business is sold, but it can’t sell itself until the pension scheme is resolved, creating a catch-22,” Saron notes.
Transferring the pension scheme to Clara could break this deadlock. “Both the vendor and the acquirer could put in some cash to improve the funding level to enable this transaction, but it will cost less than a buyout,” he adds.
Appetite for consolidation
A company that is part of an international group that is struggling to understand the complexities of the UK pensions landscape could also consider transferring its scheme to the superfund.
“Clara can give schemes with these characteristics the gift of time. It allows the scheme to get to buyout without worrying about the sponsor going insolvent and ending up in the PPF,” Saron says.
DB superfunds can offer employers 10% in savings
Employers that transfer their defined benefit pension schemes into consolidator vehicles such as Clara-Pensions and The Pension SuperFund could make savings of up to 10 per cent, according to new Hymans Robertson research.
Interest in consolidation has been strong since Clara received the green light from TPR. “We have been inundated with requests since the regulator made its decision at the end of November,” Saron adds.
“We expect to be able to announce our first transactions in the third quarter of this year.”
On March 31, Clara announced the appointment of Simon True as its new chief executive. True is set to lead Clara in the next stage of its development, while Saron will continue in an advisory role.
This article originally appeared on MandateWire.com
