Burges Salmon advises on landmark capital-backed investment transaction

Burges Salmon has advised the Trustee of the James Neill Pension Plan and James Neill Holdings Limited on the successful completion of a landmark capital-backed investment transaction with Portunes Pension Capital, marking only the second transaction of its kind in the UK pensions market. The transaction follows the Nova deal completed in 2020 and represents a further chapter in the innovation of funding solutions for DB schemes.

Capital-backed investment arrangements are an emerging innovation in the DB pensions market, designed to give schemes access to additional external capital as part of their journey planning, helping to reduce investment volatility and improve the likelihood of reaching long-term funding targets. The successful completion of the James Neill Pension Plan’s capital-backed investment transaction is another sign that the market is moving beyond a binary choice between run-on and traditional insurance buy-out.

For many years, buy-in and buy-out have been the primary long-term option for trustees and sponsors seeking to reduce risk. They continue to remain highly attractive where affordable and appropriate. However, the market is now developing a wider range of alternatives which may help schemes improve funding certainty, manage investment risk and progress their long-term objectives without necessarily moving to an insurer. The range of endgame solutions available to DB schemes continues to expand, with trustees increasingly looking beyond traditional insurer buy‑in structures. In particular, superfunds and capital-backed investment structures are emerging as credible alternatives, offering different risk-return profiles and greater flexibility to achieve long-term funding objectives.

A superfund is where, broadly, the employer’s liability is replaced by an employer-entity backed with a capital buffer, usually created by investor capital and contributions from the original employers. Last year, Burges Salmon acted on the fourth-ever superfund transaction for the Church Mission Society Pension Scheme, which demonstrated how external capital can support schemes on a “bridge to buy-out” journey. We are working on Clara for 6 other schemes in a group. Clara has described its model as providing a secure route to a future insurer buy-out, with additional capital being provided to increase member security. The Pensions Regulator also recognises superfunds as vehicles involving employer liability being replaced or supported by arrangements backed by a capital buffer. 

The James Neill Capital-backed investment arrangement includes distinctive features such as:

• the current trustees continue as trustees of the scheme
• the current employer continues as employer of the scheme
• the trustees retain their asset portfolio and employer covenant, and external investor capital is introduced alongside scheme assets;
• capital can be used to support funding objectives and long-term journey plan objectives which could integrate with existing hedging arrangements; and
• at maturity, the scheme may receive a pay-out with agreed return.

For the James Neill Pension Plan, the scheme assets will be invested alongside investor capital over a defined period, with the trustees receiving access to additional capital without needing to draw directly on the scheme sponsor. It is not a covenant replacement solution in the same way as a superfund transaction, given no change to the employer covenant is expected. Instead, the arrangement is designed to improve the pension scheme’s investment return profile and increase the likelihood of reaching self-sufficiency over time. The broader significance is that trustees now have choice to consider viable alternatives to buy-out. This transaction is notable because it shows how capital-backed investment can be used as a practical journey planning tool. Rather than transferring responsibility for the Plan to a consolidator or insurer, the arrangement allows the Plan to continue with its existing investment approach, while benefitting from external capital support and an agreed structure for sharing risk and return. 

The transaction comes at a significant time for DB scheme innovation. The recent Aberdeen / Stagecoach transaction is another example of such wider market innovation, although structurally different from the James Neill Pension Plan with the novel use of a flexible apportionment arrangement. In this case, Aberdeen agreed to replace Stagecoach as sponsoring employer and take on responsibility for the scheme’s funding and management of the scheme’s £1.2bn of assets, with the scheme continuing to “run on”. Both transactions are clearly designed to protect the schemes’ financial security and safeguard member benefits.

Our pensions team supports trustees and employers across journey planning, risk transfer and end‑game planning, including helping schemes get “transaction ready”, and advising on the legal structure of different solutions. We have also developed a Journey Planning tool for DB schemes – a triage tool, designed to present the main de-risking options in an interactive, digestible format to support early-stage decision‑making.  Burges Salmon can assist with a range of practical matters in relation to alternatives to buy-in. 

If you would like to discuss whether a capital-backed investment transaction could be appropriate for your scheme, please do get in touch.

This article was co-written by Clive Pugh, Serena Kutty and Jack Gillions.