How Clara Pensions is investing its assets

In November last year, Clara Pensions entered into the first ever superfund transaction with the trustees of the £590m Sears Retail Pension Scheme. The superfund followed this with a second deal in March, this time with the trustees of the £600m Debenhams Retirement Scheme.

As part of the landmark deals, Clara injected additional ring-fenced funding ­– £30m as part of the Sears transaction and £34m as part of the Debenhams deal – to support the schemes and provide a funding buffer for schemes. It said this additional funding would demonstrably improve member security and provide increased certainty on the pension funds' journey to an insured buyout.

But now Clara has assets, how does it plan to invest them and why did it choose a fiduciary manager, Van Lanschot Kempen, as opposed to an in-house or other investment alternative?

Driving efficiencies

Clara Pensions chief executive Simon True says there were both efficiency and governance benefits to appointing a fiduciary manager.

He explains: "Clara is very much a consolidator – we're looking to drive economies of scale, and lower per unit costs that members benefit from… As such the decision was made relatively early on that we would leverage other people's existing economies of scale rather than start from scratch ourselves."

True says there are also governance benefits in Clara having a fiduciary manager – not least because of the structure of the consolidator itself and the fact it has both scheme and buffer assets to manage.

He explains: "The fiduciary manager manages not only the scheme assets on behalf of the trustees, but also the buffer assets, which are more corporate owned.

"We manage them holistically through our own internal governance forums – such as our joint investment working group – but the fiduciary manager is independent of that and has a really important role to play in making sure we can always demonstrate that we do things in the best interests of the members."

A partnership approach

Clara appointed Van Lanschot Kempen in June 2021 – a move that was both driven by a shared "passion" for member outcomes, but also by the fiduciary manager's willingness to partner with Clara for its journey to fruition.

True says: "Van Lanschot Kempen have been on a long journey with us – longer probably than either of us would have hoped – but, through the process of engaging with The Pensions Regulator (TPR) in their assessment process, Van Lanschot Kempen were very important partners to us in that process; working through the technical aspects of how we would manage the assets, and how we would demonstrate that we had sufficient capital. They've been excellent partners for us on that journey and that's what we were looking for."

Van Lanschot Kempen head of UK Andre Keijsers echoes what True says, explaining there are three key things the firm wants to be known for – innovation, bespoke solutions and committed client partnerships.

He says these were all areas that have been demonstrated in Van Lanschot Kempen's partnership with Clara.

Keijsers explains: "Innovation with regards to Clara was incredibly important. They are the first consolidator in the UK market and, as Simon says, the process with TPR and various other stakeholders in this process – advisers, consultants, risk capital providers and so on – meant that a lot of new ground had to be covered."

He also explains how a bespoke approach to investment was also important to generate returns for members on a robust and resilient basis that stands up under a wide range of scenarios.

Keijsers says: "A customised solution is something that we pride ourselves in being able to deliver and Clara was, the ultimate case, if you will, in the UK market."

Investment strategy

Clara's portfolio is built around two main components – liability-driven investment (LDI) and high-quality credit.

Keijsers explains the credit portion of the portfolio is designed to generate resilient and stable returns that stand up under multiple scenarios and meet Clara's cashflow needs. He adds this section of the portfolio has become "slightly bigger" than they were originally thinking in 2019 and 2020, partly because of the regulatory work it had done with Clara for TPR.

He notes the thinking around the LDI section of the portfolio has also evolved, particularly after the events following Kwasi Kwarteng's Mini Budget of September 2022 – events which Keijsers says led the market to learn a number of lessons with regards to the amount of leverage that could be used, the amount of portfolio liquidity needed and the ability to operate and manoeuvre in the LDI space.

Keijsers says subsequent to those events, Van Lanschot Kempen has its clients in segregated LDI mandates – saying these clearly stood up much better during the crisis.

Van Lanschot Kempen moved to a new LDI provider – appointing State Street Global Advisers (SSGA) as its LDI manager in September last year. Keijsers says the firm has also reduced handling times in its portfolio, meaning it is able to be much nimbler.

True says Clara's investment strategy currently allocates around 35% to LDI, with the remainder in high-quality credit. Of the credit, around 30% to 35% is liquid, with the rest being more illiquid.

He says this allocation is "not particularly exotic", noting risk is carefully managed. He says: "We're not chasing very high yields, which means that our returns are relatively tightly spread. Of course, we do carry some risk - we carry liquidity risk, we carry credit risk - but we manage that relatively tightly and that's reflected in the capital that we hold. If we went down the down the curve in terms of risk, we will have to hold more capital."

True says the two deals it has completed have given the superfund "immediate scale" with some £1.2bn of assets under management – scale which has presented the superfund with some advantages.

He explains: "Those first two deals have given us immediate scale and have allowed us to create our own vehicles that allow us to invest in scale in the assets that we that we like. That also gives us economies of scale of benefits for future schemes coming in – allowing us to recycle illiquid assets, taking illiquid assets from incoming schemes and then spreading them across [the wider portfolio]."

Asset transition

Transitioning scheme assets into its own section of the Clara Pension Trust and then transitioning those assets into the superfund's strategic allocation as quickly as possible is of key importance – with both Van Lanschot Kempen and Clara saying the process is proceeding as expected at the current time.

One thing that perhaps differentiates Clara from other providers is its willingness to accept a wide range of assets – assets that can include illiquids that can prove problematic for some schemes.

True explains: "This can be a big issue for some pension schemes. A lot of pension schemes appear to be close to buyout but when they actually look to realise the value of the illiquids and they put in a redemption request, they find out that the value of these illiquid assets is less than they thought.

"One of the benefits of our structure is that, because we're prepared to take on these sort of assets in specie, we are able to deliver better value to schemes than if they had to turn those assets into cash and gilts."

Keijsers says Van Lanschot Kempen always tries to achieve "better than expected" when it comes to dealing with illiquid assets – not always taking the standard approach, but looking at areas such as the secondaries market as well as opportunities within Clara and Van Lanschot Kempen themselves.

He says: "As Simon says, there can be in specie opportunities across Clara as a whole but there are also sometimes opportunities within our own client base – and clients who have a different time horizon or a different strategic asset allocation might be interested in certain assets, particularly if it is a good manager."

Preparing for endgame

Clara's ultimate strategy is to get its members into the buyout market as soon as possible – indeed, it is only when member benefits have been fully secured that any excess assets can be released and profit taken.

True says there are two key factors impacting how quickly it can get to this endgame point.

He says: "Firstly, the better investment return we can get on the journey, the quicker we'll get there."

But True says a lot also depends on the pricing Clara gets in the buyout market – noting that the superfund is already working to ensure scheme data and administration are all in excellent order.

He says the scheme is also looking to make sure the investment portfolio is attractive to insurers also.

"It's not actually a very big step for us - it's really around making sure that the assets we've got are matching adjustment eligible and there is a repositioning over time as we get closer to buyout."

He adds: "What we try and do is take advantage of non-matching adjustment assets for a period, because they are less competed and we get some extra spread there that insurance can't access, and then we transition in the last period to make sure that we deliver an attractive matching adjustment portfolio for the insurers."

In terms of timelines for each particular scheme section, Clara projects how long it thinks it will take to reach buyout and tailors a strategic allocation of each section but keeps this under review as scheme factors and the bulk purchase market itself changes.

True says: "It's a very fluid dynamic."

The future of pension consolidation

Both Clara and Van Lanschot Kempen believe consolidation will continue to strengthen – with superfunds and other consolidator solutions playing a major role in the defined benefit scheme market.

Keijsers says: "I think consolidation will continue to strengthen. If you look at the Dutch market, there used to be over 1,500 pension schemes and there are now just 170 left, several of which are consolidators or general pension funds."

True says the focus for Clara will be on maintaining momentum and extending the Clara solution to different types of situations.

He explains: "The incoming members will benefit from the scale we are creating. For smaller schemes, access to the investment expertise is a crucial aspect of what we're doing, when we're reducing the costs and the strain on employers. We're improving governance in some situations, and we're definitely improving the access to investment scale and expertise.

"Going forward, we just want to keep this momentum going and bring the benefits of consolidation to a wider set of members."