Mixed views on plans to use the Pension Protection Fund (PPF) as a public sector consolidator emerged following chancellor of the exchequer Jeremy Hunt’s Autumn Statement speech yesterday, who announced that the UK government would consult on consolidating defined benefit (DB) schemes into a new statutory vehicle run by the PPF.
Richard Gibson, partner at Barnett Waddingham, said the announcement is a “pivotal” step towards addressing the needs of pension schemes less well served by the market. “This is indeed a positive development and welcome news.”
He pointed out that the PPF is already “an incredibly successful consolidator”, managing over 1,000 schemes, which he said it was a “testament to its robust governance, streamlined processes and simplified benefit administration”.
He added that presently, smaller schemes must prepare carefully to be able to access the insurance market and the consolidator market currently remains inaccessible to them.
“The chancellor’s promise to finalise superfund legislation and the prospect of a more permissive regulatory framework could breathe new life into the market and open up solutions for smaller schemes who cannot afford insurance.”
Elaine Torry, partner at Hymans Robertson, believes that the PPF has a “natural head start” to becoming a public sector consolidator.
However, she said that this is not the most important area of focus on in the DB policy space, and the government should not miss the opportunity to reinvigorate retirement savings.
“The PPF’s statutory objectives and operational aims as a voluntary public consolidator would differ from the PPF’s current employer insolvency arrangements. This would require material changes at the PPF, not least to cope with the myriad forms of non-standard DB benefits that exist,” Torry noted.
“And we wholly oppose any public consolidation vehicle – PPF or otherwise – that appropriates assets from the PPF’s existing employer insolvency arrangements. Any public consolidator must be voluntary and separate.”
“We wholly oppose any public consolidation vehicle – PPF or otherwise – that appropriates assets from the PPF’s existing employer insolvency arrangements. Any public consolidator must be voluntary and separate”
Elaine Torry, partner at Hymans Robertson
Meanwhile, Nicholas Clapp, business development director at TPT Retirement Solutions, pointed out that the reforms could be a “double-edged sword”
He said: “If the PPF can consolidate schemes with solvent sponsors, it may limit competition in the existing market and prevent the creation of innovative private-sector solutions.
Others pointed to concerns over the time it would take to make plans operational.
Iain McLellan, head of research and development at Isio, said: “We believe this is unnecessary and could take years to come into operation.”
He pointed out that there is already a number of “innovative consolidation approaches” developed by the industry that “already function well and are delivering the benefits of consolidation” while improving the quality of governance, investment efficiency and member experience.
He said: “We should be supporting these as an industry rather than waiting for a national scheme to emerge.”
McLellan added that if the remaining 90% of DB schemes that have less than 5,000 members were to consolidate they could generate £10bn in reduced expenses over the next 10 years.
“These savings are before you even consider the wider range of attractive investment opportunities that larger pools of schemes can access, including the more complex UK productive assets that the government is keen to see supported,” he noted.
Arif Saad, head of client advice for UK at Van Lanschot Kempen, added that the PPF as a consolidation vehicle for smaller schemes would be unattractive to commercial superfunds, but the smallest 2,000 schemes have less than £20bn of assets between them and the effort required to take on thousands would span a decade of concerted effort by the PPF.
Previously WTW also expressed concerns over the time it would take for the PPF to absorb the smallest DB schemes, saying that it would take the lifeboat 18 years to consolidate 4,500 of the smallest DB schemes.
However, the fund said it would be “well placed to take on an additional and separate function of public sector consolidator”.
Separately, the Department for Work and Pensions (DWP) embraced the lifeboat as a potential public pensions consolidator candidate speaking at the Pensions and Lifetime Savings Association’s annual conference in Manchester in October.
A PPF spokesperson said: “We welcome the government’s commitment to establishing a public sector consolidator by 2026. We believe a public sector consolidator can help deliver the government’s objectives and complement existing commercial solutions. As the government has recognised, we would be well placed to take on this additional and separate role.”
The spokesperson added: ”We look forward to working closely with DWP and industry as the detailed design of, and eligibility for, the new vehicle is developed.”
In response to a consultation that closed on 5 September on options for DB schemes and the potential for the PPF to take on the role of public sector consolidator, a substantial number of respondents expressed the fund would be an appropriate organisation to do so, highlighting the PPF’s strong reputation, experience and expertise.
Respondents emphasised that funds in a public consolidator would need to be separated from those in the existing PPF “lifeboat” fund. However, a significant number also expressed concern regarding the extension of the PPF’s remit, in the context of fairness to PPF members and levy payers.
Respondents also suggested a public sector consolidator operated by the PPF could have “moral hazard” implications.
Respondents recommended that the government consider how the PPF would be adapted in the context of a public consolidator to ensure fairness between current and future members and future levy calculations.
Stakeholders suggested it would be inappropriate for the PPF to act as a consolidator on the basis of fairness to large schemes who pay the bulk of the existing PPF levy but are least likely to enter the PPF compensation fund.
They indicated more appropriate uses of PPF reserves would be to fund a reduction in levies or a return of levies paid to larger contributors.
The government, however, said the PPF would be “well placed” to run a public consolidator addressing a specific market failure and will look to l establish a public sector consolidator by 2026, aimed at schemes that are unattractive to commercial providers.
The consultation is due to launch this winter.