DB options: PPF revises proposal; industry seeks surplus safeguards

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The Pension Protection Fund has published a revised proposition for how a public sector consolidator could be designed and operated. The amended proposal comes as a consultation on defined benefit options, a PPF consolidator and surplus extraction, closes at 11:59pm today.

The PPF claimed in its new proposal document that “there was clear support for the proposals”, saying members of its SME Forum have urged it to press on with the consolidator design and implementation “as quickly as possible”.  

It added that there was also “a strong message that significant care needs to be taken on the detailed design”, including to limit barriers to entry for small schemes, for example around the costs of transactions, and to ensure the PPF’s “role in the market” is distinct from commercial providers.  

“This feedback has informed our thinking, in particular on benefit standardisation and the onboarding process,” it said.  

The PPF is sticking to its original proposal of having a handful of standard benefit structures for the unsectionalised fund, which could mean some members might get less than they would  outside the PPF consolidator. The lifeboat provider has now published summary conversion examples to show how standardisation would work, and has made more specific proposals for onboarding large numbers of small schemes.  

Under the PPF’s proposals, it would take “schemes unattractive to commercial providers”, but only those that can “meet its terms”. There are no objective criteria for which schemes will fall into the ‘unattractive’ category, according to the PPF, but it lists small schemes, schemes with weaker funding, and those with significant illiquid assets. To allow schemes with deficits to join, it would reduce benefits if the employer becomes insolvent before completing scheduled payments.  

It noted that much in the consolidator design will depend on how much weight is given to each government objective: “To run a substantive allocation to UK productive finance assets, for example, requires the public consolidator to achieve a significant scale. If this objective is prioritised over others, changes to our design proposals are likely to be required.” 

The PPF currently allocates about 35% to gilts – noting a consolidator would support the gilts market – and 30% to ‘productive assets’. It said the separate consolidator could, dependent on scale, risk budget and underwriting, “potentially allocate around £10bn to UK-growth supporting investments”. 

Chair Kate Jones said evidence and stakeholder feedback suggested more choice in the market – in other words a public consolidator – was needed to capitalise on improved funding levels.  

“Our maturity and capabilities mean we can operate this new, separate fund – providing more choice for schemes and a secure home for transferring members – without affecting the continued successful delivery of our existing functions,” she said.    

Michelle Ostermann, the PPF’s new chief executive, added: “To fully realise the potential of the new consolidator, we believe it should be open to all schemes who, without it, may struggle to get timely access to market solutions. We remain confident that a well designed PPF-run consolidator will complement commercial providers and ultimately support a thriving marketplace which delivers for all members.” 

The PPF is open to comments on its revised proposals, which can be emailed to externalaffairs@ppf.co.uk. 

Industry wants superfunds legislation first

The Association of Member Nominated Trustees is supportive of a public sector consolidator. Co-chair Maggie Rodger said: “A public sector consolidator could definitely be of benefit, putting consolidation within reach especially for small schemes with limited or unaffordable options in the market. In a free market more options can only be a good thing.”  

There is less conviction on the side of pension funds. The Pensions and Lifetime Savings Association said "more time is needed to determine what, if any, market failures or gaps exist that would warrant establishing a [public sector consolidator]”.  
It said its members would prefer the government to put in place a statutory regime for DB superfunds – which the sector has been waiting for since a 2018 White Paper – before considering setting up a public alternative. 
“PLSA members believe that if a primary regime is provided for DB superfunds, trustees of closed DB schemes would be more likely to opt for this consolidation option,” the association said, adding that “more thought should be put into encouraging consolidation via DB master trusts”.  

If the government did press ahead with a public consolidator, “we think it should be limited to smaller schemes that may be commercially unattractive, be entirely separate from the PPF, and be underwritten by the government”, said director of policy and advocacy, Nigel Peaple.  

The lobby group representing buyout providers, the Association of British Insurers, called the proposed introduction of a PPF consolidator “a major and unjustified intervention in a well functioning and competitive market which caters to schemes of all sizes”. It argued that the majority of buyout transactions last year were for schemes with assets of less than £100m. 

“Any move to a public consolidator risks undermining this market,” the ABI said, and warned of moral hazard: “It also risks shifting the responsibility for making pension payments from private sector employers to the taxpayer, potentially letting employers off the hook from meeting their long-standing pension promises.”  

If the consolidator is set up, it should only take underfunded schemes without a strong employer covenant, but employers should continue to contribute. 

The Association of Consulting Actuaries agreed, saying any PPF consolidator should focus on very small DB schemes and “the limited number of very poorly funded schemes with weak or stressed covenants that are already well known to TPR”. 

ACA Pension Schemes Committee chair Peter Williams was with the PLSA on legislating for superfunds: “We believe government should focus on getting the superfund regime in place, including providing clarity on extraction of profit and when this can happen.”  

Surplus extraction: Calls for strong safeguards

As well as a public sector consolidator, the consultation by the Department for Work and Pensions proposed a statutory override of scheme rules to allow sponsors to extract surplus from overfunded schemes before they wind up.  

ACA chair Steven Taylor said an override “would be helpful, provided appropriate safeguards are put in place to protect the interests of scheme members”.  

It would make investing for surplus by DB schemes “more attractive, with a view to sharing surplus between members and employers, and may also encourage greater investment in growth assets”, Taylor argued. “However, appropriate regulatory guidance for trustees will also be essential to encourage these behaviours.”  

The AMNT is also concerned about member benefits. “Not only should the security of member benefits be as assured as is possible, but also their income shortfall through lost inflation linking, reduced accrual rates and higher contributions towards lower pensions, which have all helped to build any surplus, [should] be recognised and should be addressed,” it said.  

It acknowledged that members might benefit from surplus distribution, however. Extraction of surplus “could also present an incentive for schemes to reopen to new members”, it added. 

Others also emphasised member security. The PLSA’s Peaple said: “While we think release of surplus merits consideration, it is very important that any action only takes place where the interests of scheme members are secured.”  

He said it might offer a chance for some employers to use the surplus released to increase DC pension contributions without incurring tax penalties. UK employers already use DB surplus for DC contributions by moving DC members back into the same trust as the DB scheme. 
While the government is hoping schemes will be willing to rerisk if surplus can be accessed flexibly, Peaple said that “in our discussions to date, it is not clear that release of surplus would result in a large number of schemes taking more risk in their asset allocation”. 
The ABI agreed that the government’s hopes for a boost to productive investment could be disappointed, suggesting companies might instead finance share buybacks and dividend payments with the released pension surplus.  
The ABI, too, stressed the need for ensuring member security, noting that funding levels could change in the future.  
Hetty Hughes, manager of long-term savings, said: “Returning the scheme surplus to employers before benefits have been secured should be treated with utmost caution.” 
She called for putting in place “very prudent thresholds”, above buyout funding, before surplus can be removed. 

What are your thoughts about the DB proposals? 

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