PPF keen to run DB consolidator – industry cries foul
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The Pension Protection Fund has said it is well placed to run a public sector consolidator of defined benefit schemes and believes doing so would fulfil the government’s aim of ‘productive’ investment. Private sector competitors warn against putting risk on taxpayers, cross-subsidy and scaring third-party capital.
Removing the employer covenant and consolidating schemes of solvent employers could achieve the government’s objectives of greater investment in productive assets without mandation, the PPF argues in its response to a recent government call for evidence.
“A consolidator – aiming to invest for growth over the medium to long term allied with scale and professional asset management – will lead to greater allocations in productive finance while providing security for members,” the lifeboat fund wrote in its response to the Department for Work and Pensions’ call for evidence ‘Options for defined benefit schemes’, published on the closing date on Tuesday.
If the government is to whet DB schemes’ appetite for productive assets – which tend to be illiquid, higher risk and more volatile – investment objectives will need to be changed, the PPF added.
Kate Jones, who chairs the fund, said: “With almost £1.5tn in invested assets, defined benefit schemes could play a major role driving greater productive investment in the UK economy whilst securing good member outcomes. However, this is unlikely to happen under the current framework – a step change will be needed in the DB market to deliver this.”
In an interview with mallowstreet last month, Jones said the PPF was “willing and ready to play our part if called upon” to become a consolidator for schemes of solvent employers. She reassured levy payers that this would not impact them, saying the organisation already operates the Protection Fund and the Fraud Compensation Fund without any cross-subsidy.
Asked about concerns over creating moral hazard, she said: “Any change in policy or regulation, as ever, needs to be really, really thought through to be understanding the implications and ensuring that it doesn't to a point create a moral hazard or unintended consequences.”
On Tuesday, PPF chief executive Oliver Morley said: “We believe the public sector consolidator option could substantially deliver against the government's objectives, complementing existing commercial solutions, and we’d be well placed to run such a fund.”
The fund argues its entry into this market would complement private sector vehicles.
Morley added that setting up a public sector consolidator would be “a natural evolution of the PPF’s existing capabilities”. He suggested expanding the fund's remit in this way would tick the boxes for members and the government as the PPF is a “major buyer” of UK gilts, invests heavily in productive assets and, “by investing for growth over the long term, we’ve delivered greater security for our members”.
The PPF currently has more than £32bn in assets under management, of which just over a third (c.35%) is allocated to gilts and about 30% to productive assets, mainly in the UK, it said.
Industry fears public sector competitor
However, Tracy Blackwell, chief executive of Pension Insurance Corporation, contested that turning the PPF into a consolidator would mean it would invest more in productive assets.
“The PPF, because the nature of those liabilities is fixed, doesn’t actually invest that much in productive assets,” she said giving evidence to the Work and Pensions Committee on Wednesday.
Some insurers and DB consolidators warn a public sector operator would be anti-competitive or put risk on taxpayers, who ultimately stand behind the PPF.
Giving evidence to MPs on Wednesday, the chief executive of stage-to-buyout consolidator Clara-Pensions, Simon True, also warned that “any sniff of a publicly funded vehicle in the market” would deter capital from third-party investors, creating problems for private sector solutions.
However, he said he had engaged with the PPF on the topic and believes there could be a role for the lifeboat as a consolidator of schemes that have no other prospect of consolidation, “but it would have to be very tightly controlled so as not to scare capital”.
True told mallowstreetthere is no need for a public consolidator, including one run by the PPF, at this stage.
“There would be a number of complexities and challenges involved, and the progress of commercial consolidation means that DB members already have the option of a secure alternative to an insured buyout. Government efforts should therefore be directed at successfully securing and accelerating the commercial consolidator market,” he said.
For a subset of schemes, such as very small ones, the PPF could act as a bridge to a consolidator or insurer, he proposed.
The Pensions and Lifetime Savings Association holds a similar view – there should be no public sector consolidator, but if there must be one, it should only operate for schemes that cannot easily access other solutions.
Co-founder of the Pension Superfund, Luke Webster, told MPs on Wednesday there were “serious moral hazard issues” in turning the PPF into a consolidator. He agreed the state should only become involved in the case of schemes that the market has found not to be attractive.
“If the PPF has an unconstrained commercial mandate, then there are issues with competition," he said.
Webster also argued there would be a risk of indirect cross-subsidy from all levy payers to the schemes of solvent employers underwritten by the PPF, saying the PPF’s risk is in turn underwritten in large part by the levy.
Co-chair of the Association of Member Nominated Trustees, Janice Turner, was less concerned about the idea of a PPF-run consolidator, as long as investments are not directed by government, for example towards UK assets.
Turner said that “trustees are likely to see having to invest in accordance with the wishes of the Treasury as a negative, and it could make the thought of entering the consolidator less attractive.”
PPF: 'One option could be for government to underwrite the risk'
A public consolidator operating at scale would be integral to delivering increased allocations to productive finance, according to the PPF.
“We think the government could achieve this without being detrimental to buyout providers or commercial consolidators. Even if a public sector consolidator were to be made available to the smallest 4,500 defined benefit schemes, that would still only cover 15%, or [about] £200bn, of £1.5tn in total defined benefit assets,” a spokesperson for the fund said.
The PPF also suggested government could design a consolidator to focus on schemes that are less attractive to the commercial market.
“From the evidence we see, insurers and commercial consolidators are primarily interested in larger, better funded schemes,” the spokesperson said.
However, the spokesperson added: “Our response points out that the more the size of scheme is restricted, the less impact a public consolidator could have on the government’s productive finance goals.”
About the allocation of risk, the PPF proposes socialisation of private sector risk as an option, arguing that the UK would, in return, benefit from increased investment in its economy.
The spokesperson said: “We’ve identified that the government may want to consider options for underwriting a public sector consolidator. One option could be for government to underwrite the risk – this would give complete reassurance to schemes considering moving to a public sector consolidator, and in return support investment in productive finance, supporting the UK economy in line with government objectives. We have also noted that if a public consolidator has an appropriate starting funding level, invests for value and looks to grow steadily over time, it is unlikely to need additional support.”
Have your say – should the PPF enter the DB consolidator market?