If your charity sponsors a DB pensions scheme, you might be thinking about the Clara Superfund. Sam Jenkins from LCP explains what it is, what a transfer involves and what the opportunities and risks are.
The DB Superfund Clara-Pensions ("Clara") recently completed its first transaction for a pension scheme sponsored by a not-for-profit employer, the Church Mission Society (CMS).
This was Clara’s fourth transaction, following previous deals with pension schemes sponsored by Sears, Debenhams and Wates, as it continues to build credibility and scale (with c.£1.4bn of transactions now completed).
Charities who sponsor DB schemes will want to understand whether this option could be right for them.
What is a DB Superfund and why might a scheme transfer to one?
DB Superfunds like Clara provide an exit option for employers and schemes looking to transfer the responsibility for paying member benefits to a third party.
They provide an 'exit option' that is an alternative to the traditional route of insured buy-out, under which responsibility for paying benefits is passed to an insurance company.
Unlike an insurer, a DB Superfund is a registered pension scheme into which other schemes can transfer their liabilities. As part of the transfer, a scheme will need to transfer sufficient assets to meet the DB Superfund’s entry price. A key benefit of a DB Superfund is that this entry price is expected to be lower than the cost of an insured buy-out.
As part of the transfer, the DB Superfund provides capital to help ensure member benefits are met in full. However, DB Superfunds do not operate in the insurance regime and there are important differences in security relative to an insured buyout.
In addition, the Pensions Regulator needs to approve any transfer to a DB Superfund, and a series of 'gateway' tests need to be met.
Rationale for the CMS transfer
A typical transfer to Clara will involve:
- Clara targeting insured buy-out over an agreed timescale (typically c. seven to eight years);
- Clara providing capital to support the scheme over this journey to insured buy-out; and
- The scheme’s sponsor providing additional funding to meet Clara’s entry price.
A new feature of the CMS transfer – relative to the three previous Clara transfers – is that a link back to the sponsor has been retained by the scheme in the unlikely event that it is needed.
Therefore, scheme members continue to benefit from the security provided by the existing sponsor (as well as the additional capital provided by Clara).
In previous Clara transactions, the employer achieved a clean break from its pension liabilities – this is not the case for the CMS transaction. From CMS’s perspective, there is a reduction in risks (e.g. as a result of the additional capital) and potentially reduced ongoing expenses, but some risks remain.
Wider developments in the DB Superfund market
Alongside Clara building scale and completing their fourth transaction, we have had further positive developments in recent months with:
- a formal legal framework for DB Superfunds, set out in the draft Pension Schemes Bill 2025;
- relaxations in this draft bill which are expected to make DB Superfund transfers easier; and
- public statements that the Government wants to see the DB Superfund market 'thrive'
We are fully expecting these developments to lead to continued innovation in this space as more employers and schemes explore how DB Superfunds could fit into their strategy. We are also aware of multiple new entrants who are expected to join the DB Superfund market in the coming months.
Key takeaway
As new options and opportunities emerge, the need for charities, and the trustees of their pension schemes, to assess the full range of options available becomes even more important.
What is the right option for one DB scheme won’t necessarily be right for another. But DB Superfunds provide an important new option that should be considered by any charity planning for its DB scheme’s end-game.
About LCP
LCP is an independent UK pension advisory firm. It has a specialist team dedicated to charities and not-for-profits who provide actuarial, investment and covenant advice. If you want to read more about LCP’s charity team then you can find our more on their website.