In 2020 the first capital-backed journey plan (CBJP) was completed, ushering a new way of transferring risk from the books of defined benefit schemes. The emergence of a de-risking structure underwritten by a third-party capital provider offered a means of improving scheme funding levels at a time when a large proportion of those in the UK were in deficit and the prospects of reaching buy-out or other financial targets looked dim. Two years later, however, as interest rates rose and schemes found themselves edging closer to full funding, CBJPs fell off the radar: the maiden deal remains the only one publicly announced, although there has been talk of others being struck in secret. Fast forward to today and the pensions landscape has changed again, with new surplus access rules in play that could resuscitate the CPJB. “I am seeing a lot more corporates and trustee boards properly examining whether they should be running on for a time to build and access surplus instead of looking to buy out in the short-term,” said Matthew Cooper, Head of Pension Risk Transfer at PwC UK. “A number of the capital-backed funding arrangements evolving their offerings to support pension schemes in running on to generate surplus.” With just one deal struck, it’s impossible to speak of a typical CBJP. However, the 2020 contract provides a foundational framework for future contracts. That deal saw an unnamed provider agree to allocate capital to invest along with the scheme’s own assets in a more aggressive manner than the scheme’s own investment strategy. The transaction was entered into to accelerate the time to buy-out, for which a target level of funding and completion date were set. Under the CBJP model, and unlike other similar models, the sponsor remained attached to the scheme and trustees maintained control throughout. There are several benefits to a capital provider in such a contract. As well as their own capital, the provider gets to harness the firepower of the scheme’s assets to seek higher returns than would have been likely under the risk profile that trustees are willing to tolerate. Any excesses over the target could then be pocketed by the provider as profit. Also, because such deals aren’t covered by the Prudential Regulation Authority, they are easier to close. As well, the defined maturity of the contract and the clear exit strategy is seen as attractive to additional potential capital providers. Trustees benefit from the higher degree of certainty CBJP’s bring to achieving their scheme’s financial objectives and also by shifting the investment risk to the capital provider, whose contribution would be the “first loss” absorber in the event of market losses. While the only publicised deal was written to bring the scheme’s funding to a level that would support a buy-out, similar contracts could be used to achieve other financial targets, says Ian Wright, Technical Director at Arc Pensions Law. “These structures are a bridge, as it were, because what they’re really doing is putting some capital underneath the scheme to enable it to do something more aggressive than it otherwise would be able to do, so that it can go faster, quicker to somewhere,” Wright said. One of the possible “somewheres”, he suggested, is surplus expansion. And this is where a window of opportunity may be opening again for CBJPs. The UK has said it is considering rules to loosen access to surpluses in a bid to liberate more capital for invested in the British economy. This would make a run-on attractive to sponsors and may also benefit members if part of those extracted surpluses were ploughed back into the scheme. “The world has changed and it may be that people will now look at them [CBJPs] differently,” says Wright. Cooper agrees. “Driven by higher funding levels and the prospect of changes in legislation, there is a lot more discussion around how pension scheme surpluses might be accessed,” he said. “The addition of third-party capital to support an investment strategy designed to generate surplus may be attractive to trustees in terms of providing greater downside protection, albeit the provider will be looking for a share of any future upside.” While underfunded schemes are seen as the most likely candidates to use CBJPs, the structures could become attractive to healthier schemes under a new surplus regime. “Rather than being something you do because you’re uncomfortable, it might just be a sensible thing to do as part of a long-term journey plan to get you there a bit quicker and give you more wiggle room,” Wright said. As attractive as they might become, there remains likely resistance to CBJPs’ adoption. Both Cooper and Wright suggested that the immaturity and novelty of the structures could work against them. The pensions market is inherently conservative and averse to trying anything that’s new and untested. A sudden surge of interest in CBJPs is therefore unlikely even if the Treasury does decide to make early surplus releases easier. “Capital-backed funding arrangements are new, complex and will require considerable due diligence from trustees and sponsors in order for them to get comfortable to enter into such arrangements,” says Cooper. Trustees may also look uncharitably to one of the key elements of the structures: that some or all of the returns above those targeted in the contract would go straight to the capital provider. Trustees may argue that a well-managed scheme could also accrue better returns without ceding any of the upside. Wright is less convinced by such an argument. Providers are saying “for a period, we will do something ourselves that you couldn’t do, but from your perspective we’ll do what you were going to do anyway with more certainty and if we manage to do better, well, that’s good for us”, he said. “That’s the whole point of providers entering into these sort of transactions: you’re still not losing something, because you could never have done what we will actually do on your own, anyway. And I think that’s the sweet spot for this sort of structure – if you look at it in that way, it can be for some schemes a bit of a no brainer.” It’s likely that new providers will be eyeing the market whatever the decision of the Chancellor of the Exchequer. Cooper suggests that private equity fund managers would see an “alignment of interest” in the structuring of CBJPs and the ease of putting them together away from the gaze of the PRA. Hedge funds have also been mentioned as likely contenders. Both would benefit additionally by being able to direct some of the invested capital into their own funds, giving them a return through the management charge and any investment upside. One other contestant looms on the horizon – insurance companies. They are already active in the industry as the buyers of pension risk-transfer deals and putting capital to work within a CBJP would not require a huge step outside of their core competencies. Their involvement would also put them in an advantageous position to advise and back the scheme on any future buy-out plans. Further, as Wright explains, that would put them close enough to the trustees to ensure they have their data and legal estates in order to expedite an eventual wind down. As the industry awaits the next move by the Chancellor, Cooper says trustees and advisers are carefully considering multiple de-risking avenues, pointing to the success of superfunds as indicative of a thirst in the market for alternative funding structures. “If trustees are looking at those, I think they will look a bit broader and look at these capital-backed structures as well,” he says.