LCP has predicted that if the superfund industry reaches £1bn over the next 12 months, there could be a rapid expansion to £5bn or more annual volume by 2023, in a new report which urges pension scheme sponsors to take a proactive role in setting pension scheme strategy.

‘Leading the way’ says that a range of factors mean that sponsors will need to work more closely with trustees. This includes:

• the arrival of superfunds and the closer proximity of many schemes to buy-out;
• the increasing use of asset backed funding and contingent contribution agreements to protect schemes and allow them to share upside as sponsors recover; and
• a more defined role for sponsors in long term decision making when the Pension Schemes Bill is made law.

The report highlights that the majority of well-funded schemes are eyeing an insurance buy-out as their end target. Around a quarter (28%) of schemes surveyed said they were considering a buy-out market approach by the end of 2022. But the report warns this means demand may outstrip market capacity. This means that many schemes will need to remain in the funding regime for significantly longer than anticipated or, depending on circumstance, consider other innovative solutions such as superfunds.

Other key findings include:

• Around a third of sponsor companies currently have contingent funding arrangements for their schemes. This is expected to rise to 40% or more for upcoming valuations;
• 10%-15% of sponsors temporarily suspended deficit contributions in light of Covid-19. An important part of these agreements was deciding how contributions would switch back on as businesses recovered. This flexibility was welcomed by sponsors and “contingent contribution” mechanisms now look set to become a key part of future funding agreements for many schemes.

Steven Taylor, report author and Partner at LCP, commented:

“Sponsors can no longer take a back seat when it comes to pensions. A combination of new funding rules, economic turmoil and new legislation creating criminal sanctions for ‘getting pensions wrong’ means companies are going to have to be much more proactive when it comes to pensions.

“Sponsors now need to consider an increasing range of options for reaching their desired endgame and to be more active in planning for that destination. Without increased capacity in the derisking market, sponsors will need to consider alternative options such as agreeing efficient contingent funding arrangements. Weaker sponsors may also wish to explore the new superfund route, which has significant growth potential. It is crucial that at a time of economic and regulatory change trustees and sponsors are working hand in hand.”