The Pension Protection Fund has said a public sector consolidator should not solely focus on defined benefit schemes unattractive to commercial providers, as it identifies over 2,300 as its potential future market. It also asks for public money to have a starting capital buffer.  

The PPF published a discussion document on public sector consolidator design on Friday, a week after the Department for Work and Pensions’ consultation on the topic. It includes aspects some in the industry might take issue with – such as giving the publicly backed consolidator free access to the market.

The PPF’s interim chief executive Katherine Easter said: "We've published our initial views on how a public sector consolidator could be structured, in response to the questions posed in the consultation document. It’s not a complete or definitive solution, but we hope that sharing our early thinking will support an effective debate that helps us to refine or change our proposals so that we can develop the proposition over the course of the consultation period."  

The regime recently proposed for commercial DB consolidators included a ‘gateway test’ based on funding levels – considered key by the insurance industry – but the government is much less keen on having such a test for its own consolidator.   

Asked about the absence of a gateway test, a DWP spokesperson said: “The government is overhauling the pensions landscape to provide better outcomes for savers and deliver for the wider economy. As part of this, we are consulting on proposals for the establishment of a public sector consolidator, which seeks views from industry on a range of areas, including what would be the most appropriate approach on eligibility.”

Having initially calmed nerves by saying a PPF consolidator would only take on schemes ‘unattractive’ to the market, the Department for Work and Pensions’ recent consultation on defined benefit options stated there should be no fixed criteria for which schemes are allowed to enter a public sector consolidator. 

“Although the consolidator would primarily be targeting smaller and less well funded schemes, we recognise that there is merit in setting a predominantly principles-based approach to eligibility, as opposed to restrictive eligibility criteria, at the start,” it reads.  

Features like benefit harmonisation in the public sector consolidator would in any case make this option less attractive to schemes that could be a target for the commercial sector, it argued.
 

   

In its paper, the PPF has now re-emphasised this shift to full market access, saying that to ensure or guarantee the public sector consolidator will achieve significant scale, “moving the PSC away from focussing just on schemes unattractive to commercial providers” might be necessary. Under its design, it would be required to accept transfers from all schemes that can meet its terms.  

The PPF sees its core market for consolidation being the very small schemes, but also potentially taking on larger schemes that are poorly funded or have weak covenants. At the same time, it notes that schemes with less than 80% funding on a buyout basis would not be targeted.  

A further contentious point is likely to be the amount of government support provided, if any. The schemes transferring into the public sector consolidator will come from solvent employers, but the PPF argues taxpayer money should be provided.

If the consolidator is to match the Pensions Regulator’s funding principles for commercial operators, it will need third-party funding for creating a capital buffer, the PPF said.  

“A key question in the design of the PSC, therefore, is who provides the required buffer fund,” it observed.  

This should come from the public purse, it said, since it is a government objective to provide a secure endgame solution for schemes “unattractive to commercial providers” along with increasing investment in UK productive finance, “with the aim of benefitting the UK economy and UK taxpayers”.   

“We, therefore, believe there is a clear case for the government to provide the buffer for the PSC," said the PPF.   

This support, however, could be “capped”, it suggested. Given finite support, this would also mean the public sector consolidator would need to be eligible to enter the separately managed lifeboat fund, the PPF added.