The UK government’s decision to increase Pension Protection Fund (PPF) compensation has raised concerns in the House of Lords over whether new superfund rules could force otherwise viable schemes into premature wind-up.
Under the Pension Schemes Bill, superfunds must wind up and move into the PPF once their assets fall below a “protected liabilities threshold”, set with reference to the cost of securing PPF-level benefits with an insurer.
Peers warned that extending indexation to pre‑1997 PPF compensation has pushed that threshold higher, in some cases above the “low-risk trigger” at which investors would be expected to inject more capital.
Sharon Bowles (Baroness Bowles of Berkhamsted) said the change risks turning the design “upside‑down”, with superfunds potentially hitting the PPF wind-up point before reaching the level that should prompt additional capital.
She warned this could deter investment, narrow the market for superfunds, and reduce the chance that members receive benefits above bare PPF levels.
Maeve Sherlock (Baroness Sherlock), minister of state at the Department for Work and Pensions (DWP), acknowledged that it “would not be good for members’ outcomes if a superfund is required to wind up prematurely when there is still a strong likelihood that benefits can be paid in full”.
She said the wind-up threshold was set above the statutory Section 179 valuation – a mandatory, periodic, simplified actuarial valuation of a defined benefit pension scheme’s funding position – to protect the PPF, but admitted the uplift has altered the balance.
Sherlock told peers that the detailed calibration of the protected liabilities threshold will be revisited in secondary legislation, with consultation promised to ensure pension funds are not tipped into the PPF unnecessarily while still safeguarding the lifeboat fund.
A regulation-making power will also allow the secretary of state, in defined cases, to declare that a threshold breach has not occurred, reflecting how technical provisions and Section 179 liabilities can converge in very mature schemes after the uplift.
Buyout
Peers also questioned whether the “gateway test”, which blocks schemes capable of full insurance buyout from using a superfund, remains appropriate once PPF benefits have improved.
Deborah Stedman-Scott (Baroness Stedman-Scott) said buyout is treated as a “morally superior destination” even when it may offer poor value, absorb employer resources, or lead to loss of discretionary benefits members expect.
She added that well-capitalised superfunds can improve security compared with many stand-alone schemes and, in run-on models, may allow future surpluses to be shared with members or sponsors while investing more in long-term productive assets than traditional de-risked portfolios.
She warned that requiring trustees to prove buyout is unaffordable before considering a superfund risks “stunting” the market before it matures.
Sherlock defended the cautious approach, insisting superfunds are intended as “a slightly less secure, more affordable endgame solution” for schemes that cannot afford buyout, not direct competitors to insurers governed by the Solvency UK regime and backed by the Financial Services Compensation Scheme.
Rauri Grant, head of policy and external affairs at TPT, said overly onerous government rules could prevent superfunds from reaching the scale needed to benefit members and the wider economy.
He noted that while the PPF indexation was broadly right, it created “a quite big problem” by switching the low-risk trigger with the wind-up trigger.
“You would hit the wind-up trigger before you hit [the low-risk trigger], which is not how policy has been designed,” he said.
With secondary legislation expected following Royal Assent, Grant said the main concern is “unclear what the actual fix will be”, questioning whether the wind-up trigger is needed at all, or whether trustees should decide the approach with regulators rather than following set triggers that “don’t actually necessarily function in the best interest of the scheme or members”.
“It’s good that the government is recognising the issue, but ideally, they would deal with it in primary [legislation], to give a bit more clarity and certainty about what the actual is and how we are going to get around it,” he added.
