There must be something in the water at the DWP.

First NEST now the PPF make bids to become our national pension providers. I am not against state run pension funds, but I am against the creation of state oligarchies by stealth. NEST have burnt their way through the best part of £600m of DWP loan to make it to #1 , the PPF are gaining supremacy by buying up liabilities on the cheap.

Now they are re-writing the rule-book. At first sight it looks like they’re doing so  to include the British Steel Pension Scheme in its portfolio of assets, a renationalised pension scheme bought back on the cheap from the private sector with the members taking a substantial hair-cut.

But we look as if we are spared that.

The FT reports today that plans are being drawn up so that schemes (such as Tata’s BSPS) can be hived away from the employer and run on a sufficient basis ,  under the PPF’s auspices. The BSPS will no longer be an occupational pension scheme, it now looks unlikely to go into the PPF.

My spies tell me that there is nothing that the PPF would like more than to have BSPS  in the fold. Tata’s BSPS is a well run scheme with substantial reserves (see below)

The scheme has sufficient assets to stand alone and run-off – a recent  press release states they have a buffer of £2 billion, which is more than adequate to run off the scheme under the current benefit promise  – the scheme size is about £15 billion of assets.

According to one economist friend of mine, the £2bn is modelled on some super prudent assumptions, the buffer may actually be as much as 3bn.

The key to the BSPS’ solvency  is a  variation of section 67 (PA 95) to enable reduction of RPI indexation to CPI. This is a significant reduction in benefits but a better deal for (most) members than falling directly into the PPF.

A formal consultation (of members) is due to begin on 19th December . We thought that there would be  a split of the scheme – assenting and non-assenting. This has happened before – at Kodak as an example. Some members may feel better off in the PPF (older pensioners for instance).

It now looks as is someone has given BSPS a waiver so that it can change its indexation basis from RPI to CPI. On this basis BSPS looks self-sufficient

Tata will undoubtedly pay a premium to be shot of it (BSPS has a charge over a Tata Dutch steelworks reckoned to be worth £600m). Things look good for the scheme which now looks like an annuity provider rather than an occupational pension.

There is a  question is why it should be overseen by the PPF and why it form part of the PPF’s levy calculations. Surely a self-sufficient BSPS has more in common with friendly societies, insurance companies and the like and should be overseen by the Prudential Regulatory Authority.

The consultation may now be redundant.

As far as I can make out, some members might feel they are better off in the PPF, especially older pensioners who may feel more security getting their pensions paid by a Government agency.

That said , things become a lot simpler. Tata has done with defined benefit pension liabilities, jobs remain and the loss to members is marginal. The PPF has a new constituency of schemes from which to extract revenue and the options for “restructuring” available to the major consultancies – broaden.

The member pays

There is another significant issue here; it looks as if we have a new kind of pension provider for solvent pension schemes that lose their parents. We might (say it quietly) think of them as third way – defined ambition – verging on CDC

 This is good news, the PPF is increasingly predating on schemes that might normally be considered solvent. It is doing so by raising the solvency bar.

Actuaries are required to value pension schemes using S179 guidance. The definition of s179 guidance is moving in the PPF’s favour – schemes must now demonstrate a level of funding sufficient to immunise the PPF from risk; the PPF cannot take on schemes that are solvent under s179 so the harder the solvency conditions , the better the quality of schemes the PPF gets; the s 179 bar is now set so;-

“ broadly speaking, what would have to be paid to an insurance company to take on the payment of PPF levels of compensation.“

The insurance company does of course have to factor in cost of capital and profit margin. To use actuarial parlance, s179 was 83% of technical best estimate and is now aligned to s143  which is  around 106%. This is a considerable hike of the bar.

This means schemes that might have been considered out of the PPF’s reach are now considered basket cases. If you look at this chart (p40 of the purple book) you can see that the PPF is being fed tasty morsels from the occupational smorgasbord.

The assets of most schemes now going into the PPF exceed the present value of liabilities My source reckons that of schemes acquired  over the past year, just 3 have had  genuine deficits  value and 54 have been profitable to the PPF.

Another  expert reckons that the PPF would have made a profit of £4 billion over the benefit liabilities they acquire from BSPS.

Triumph or conspiracy?

We are seeing a new entity being created , the self-sufficient PPF  pension scheme operating under a new set of rules with special governance requirements

This may be a fore-runner for CDC – a member mutual in all but name, that could increase benefits above CPI when times permit.

If this is what is made available to ordinary people, then maybe we do not have such a bad outcome. BSPS is a magnificently managed operation – with stated administration costs of £62 per member all-in and consistently superior fund management performance.

It is the very model of how I would want my pension to be managed. If the plan, was for me to hand over my money purchase benefits in exchange for a BSPS scheme pension -I would seriously consider it.

But like the BSPS members, I would want assurances  that my interests were at the fore. I fear that the DWP/Tata deal, engineered behind closed doors may not have pensioners interests at heart. John Ralfe has correctly pointed out that in the cases of Trafalgar House and Polestar, self sufficiency proved a myth and the members would have been better served had the link to the employer been enforced or even had the schemes entered the PPF day one.

If the examples of Polestar and Trafalgar House are followed, and poor practice prevails, the new entity will have been created at great expense for nothing. It will be  the kind of corporate restructuring that makes everyone money but the pensioners.

Tata/BSPS is a high profile scheme , no doubt the re-engineering of the pension arrangement will be trumpeted as a triumph (and a precedent). But a deal cannot be achieved without proper consent. The consent of other levy payers might be harder to get than from relieved members.

A degree of transparency is needed. There need to be clear protection for employers continuing to sponsor schemes who will be feeling very nervous about their rivals “doing a Tata”.

Otherwise the door could  be open not just to Tata but to any other large corporate who would like self-sufficient pensions overseen by the PPF. That would  take a wide door!