Thinking the unthinkable for our PPF

What if the PPF was given an upgrade and used its massive financial strength to pay benefits at the levels members were promised from their original defined benefit pension scheme?

This isn’t the thought of a random blogger but a proposal put to Government and – last Tuesday – the Pension PlayPen, by LCP, one of Britain’s most respected pension consultancies.

The idea seems at first to be too outrageous for further consideration. It has long been thought the primary duty of a trustee and the Pension Regulator, to keep schemes away from the PPF. The PPF has been branded from Scunthorpe to Port Talbot as a pension pariah, reducing pensions in payment by 10-25% and a stigma on a sponsoring employer, even if it survives the offload of its pension.

But we are being asked for bold and innovative thinking and LCP’s proposals have merit. Rather than simply topping up current pensioners using the trapped surplus of a well run fund, LCP is proposing that the PPF is continued to be funded by levies so that equivalent benefits could be a sustainable ambition of the fund. I’m not a party to the details , but at a high level , I can see advantages for the pension system as a whole.

1. It has never made sense that members had to take the pain of a sponsor failure. The PPF haircut is fundamentally unfair
2. If you take that view, then the PPF’s strategic aim is not so much a lifeboat but a continuity plan, taking over where a sponsoring employer cannot.
3. And this would mean a PPF that was more ambitious in its long-term aims, investing rather than insuring its fund.
4. The PPF could seed the sovereign wealth fund accessible to DC savers proposed by Nicholas Lyons, Nigel Wilson (with apparently  the support of L&G Brit insurers -Aviva Phoenix and M&G).

Adopting this mindset, there could be further advantages to the tax-payer.

1. TPR would no longer see protecting the PPF as a primary objective (and could focus on better things)
2. The DB funding code could be abandoned
3. Schemes of all sizes would be given the option to invest rather than insure
4. DB pensions would become a source of productive finance for the UK again.
5. This would maintain a better balance between risks assumed by DB and DC investors

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How could the PPF help DC savers?

Here is the Lord Mayor in the FT

“We have to create a scheme that enables 30 to 35-year-olds to put money aside to give them a proper retirement pot. Everybody’s [defined contribution] pension should have 5 per cent invested in this fund. Then everybody’s got a stake in the future of these British businesses, everybody’s going to benefit when they succeed.”

If the Government were to see such a fund with £50bn, Lyons thinks the private sector could find £50bn more. If we are serious about DC savers investing in private markets, using the PPF as a source of seed money sounds more serious than “facilitating ” through an LTAF wrapper.

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Market impact

Of course there would be consequences for risk-transfer

1. A primary driver for buy-out (at scheme level) and transfer-out (at member level) would disappear
2. Pressure on insurers for buy-out would reduce, with positive pricing implications for sponsors and members
3. The seeming imperative for mark to market accounting of scheme assets would reduce
4. More schemes would stay open for future accrual and some might even reopen.

Stephanie Hawthorne has been writing recently about “DB lite” and this could become a reality if we moved from thinking of PPF as less disaster recovery and more a succession and continuity plan.

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In the interests of balance

There will be widespread disgust at this proposal by a large part of the pension aristocracy who have already worked out their entitlements in the carve up of the DB corpse.

They will argue against what they see as “moral hazard”, with employers encouraging trustees to take excess risks as a shot to nothing. This argument can be balanced against the consequences to employers when pension schemes fail.

There will also be arguments that such proposals would unleash a tsunami of schemes heading for the PPF as employers find new ways of dumping schemes and “phoenixing”.  This is a consideration for Government but one that can be legislated against/

There will be arguments that the strain on PPF will be too great and that levies for the remaining schemes (schemes that have bought out pay no levies – nor do insurers), will become a “forever” burden.

These arguments are good to have. They mean that for the first time in a quarter of a century, the direction of travel switches from “de-risking” to a growth agenda.

Nicholas Lyons will be appearing at a DG conference later in the month and I look forward to asking him what his attitude to these proposals might be. He is – as well as being Lord Mayor of the City of London, – Chair of Phoenix Insurance.  That makes for an interesting set of perspectives.