The UK Treasury is suggesting that “struggling” defined benefit (DB) pension schemes could choose to opt in to the Pension Protection Fund (PPF), which likely means it would provide full benefits to members of those schemes and potentially release sponsoring employers that were otherwise struggling to support those schemes, according to a report in the Financial Times.
The apparent intention is to grow the size of the PPF asset base from the current £39bn (€45bn), and allow the Treasury to have some influence over how those assets are invested – to support strategic objectives to grow the UK economy. Currently, the PPF makes its own decisions on how to invest its assets.
Consultancy LCP said it welcomes questions being asked about whether the DB pension system could be reformed for better outcomes, and agrees that “the PPF is a successful model that can be built upon to deliver better outcomes”.
LCP told IPE: “There has been a lot of focus in the pensions industry about how to get DC [defined contribution] assets to work harder for the UK, and we’re glad the focus is shifting to the (much larger) pool of DB assets.”
Some important questions about the proposals
David Wrigley, investment partner at LCP, believes there are important issues relating to the new proposals that must be addressed. These include:
- What level of assets would be required to “opt-in” to the PPF? Would outstanding recovery plans be due prior to entry, or would sponsoring employers have those “written off”?
- Does this proposal reward companies that haven’t well-funded their schemes? Is that fair on companies that have contributed more over recent decades?
- Would this create significant “moral hazard” risks of schemes adopting very risky strategies, viewing the opt-in PPF as a failsafe?
Commenting on the Treasury’s proposals, Wrigley said: “This is a fascinating development, and highlights that the mindset across the industry is changing from DB pension schemes being viewed as a problem, to being viewed as an asset. These proposals would represent seismic changes to the UK pensions landscape, with far-reaching implications. With scant details on how this would work in practice, there are many more questions than answers at this stage.
“We think that DB schemes now present an opportunity to generate substantial excess assets over the long-term, so the obvious question is who should benefit?
“Under these plans, it seems the Treasury stands to benefit. Both in terms of directing the investment of large pots of assets, and also presumably with half an eye on an eventual surplus emerging from the PPF.”
Wrigley added: “We have developed an alternative approach where the PPF remains a ‘backstop’, but providing 100% cover. Under this model, the benefits of investing DB assets could be shared across DB members, sponsoring employers and the (largely DC) retirement savings of those companies’ current workforces.”
Alex Hutton-Mills, managing director at Cardano Advisory, the former Lincoln Pensions, welcomed the emergence of the PPF as a ‘master consolidator’ but urged caution over levy charges.
He said: “The thinking behind extending the remit of the PPF to cover DB schemes with ‘stressed’ corporate sponsors is certainly welcome in an environment with elevated interest rates and inflation, which are increasing the pressure on cash flows of affected businesses.”
He continued: “A new ‘master consolidator’ in the PPF would provide flexibility for small schemes or ‘stressed’ corporate sponsors of DB pension schemes where the funding can be directed at the investment needs of UK plc and elsewhere.”
“However, further thought is needed regarding calibration of PPF levy charges, given the risk of increased levies for the residual corporate sponsors,” he said.
Stakeholder consultation needed
Matthew Arends, head of UK retirement policy at Aon, noted that the funding position of the PPF has increased significantly recently, “which is good news for the security of benefits of PPF members”. However, it is prompting a number of parties to propose a widened scope for the PPF, he added.
“The PPF assets have been built up by levy payers – ultimately UK businesses with ongoing DB pension schemes. The risk of shortfalls rests with the members of the PPF getting (further) reduced benefits. UK taxpayers and the UK government do not underwrite PPF benefits. So any change in PPF scope should principally be consulted on with its stakeholders – levy payers and PPF members. They are the ones who bear the risk from changes,” Arends said.
He recalled that the PPF has allowed similar cases in the past, soon after it was created, adding that reports indicated that the PPF took equity stakes in companies relieved of their DB pension schemes.
Arends added: ”The proposal is not without precedent. However, it raises very significant issues, such as the moral hazard risk, the danger that it could offer those companies a competitive advantage over successful UK businesses with DB schemes, as well as the problem that the risk of over-extending the PPF falls on levy payers and PPF members.”
A spokesperson for the PPF said: “The PPF’s future role is a matter for policymakers, but we recognise there are opportunities which could deliver better outcomes for defined benefit scheme members and support the wider economy. Given our proven skills and capabilities, including our investment expertise, we stand ready to support government and industry where PPF could form part of the solution.”
According to the UK Treasury, during the spring Budget, the government announced a package of measures that will support increased investment in innovative companies. It is understood that the Treasury is working on a further package of measures to bring forward by the autumn.
The measures unveiled at the Budget include an extension of the British Patient Capital programme, and the accelerated transfer of the £364bn Local Government Pension Scheme which is expected to increase investment into innovative companies.
A government spokesperson said: “We’re determined to increase investment into the UK’s high-growth sectors, ensuring our most cutting-edge businesses can access the finance they need to scale up and list in the UK.
“Unlocking the billions of pounds held in pension schemes across the country is key to channelling capital into productive assets in a way that benefits both businesses and pension holders – powering economic growth and increasing the retirement income of millions of savers.”
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