What does the Government really have in mind for the PPF?

As the FT reported yesterday, the Treasury appears to be mulling over breathing fire back into DB by converting the PPF into a means for the sponsors of small and struggling DB schemes to offload their schemes. This would mean the PPF rivalling insurers and superfunds as a consolidator.

Many employers have been trying this for years, closing down with a pre-pack only to “phoenix” once the pension scheme has entered the PPF’s assessment. That is not , presumably, what the Treasury has in mind.

The problem with dumping your pension scheme is the same as “fly-tipping”, it’s only good for you – and only so long as you don’t get caught.

The people who are most impacted are the members- whose benefits take an hair-cut meaning they get smaller pensions. A few years back, the Ilford Ruling made it harder for the sponsor’s executive to get out of the pension at full value (via CETVs) and fly-tip junior members, but many schemes now have sponsors who were never in the scheme. Which is why the Pensions Regulator pays so much attention to the “sponsor covenant” and spotting impending chicanery

As a result, the PPF is taking a lot less new business. What it is getting is schemes with genuinely distressed sponsors, not dodge-pots like Bernard Matthews

At a very high cost, the PPF has been “protected” by the PPF and is now a surprisingly successful enterprise that beats all the targets set for it and is fast reducing its levy on the industry as it moves to self-sufficiency. There are many  who would see the levy scrapped but they don’t include the consultancy LCP who have put forward one idea for the PPF’s future.

I’ve written about this several times on here and am glad to see that when Professional Pensions asked for comment on the FT’s story. This is LCP partner David Wrigley

 “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.”

“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?’.”

LCP said that under the reported proposals, it seemed as if the Treasury stood to benefit – both in terms of directing investment of large pots of assets, and also presumably with half an eye on an eventual surplus emerging from the PPF.

This is a very jaundiced reading of the situation suggesting that Jeremy Hunt is no better than sponsors who ditch their schemes in a pre-pack abandoning the members who haven’t got out via a CETV.

Were this to be the case, I could see a run to IFAs still prepared to handle DB pension transfers with clients demanding a transfer value based on scheme benefits – not PPF ones.

But Wrigley said there were alternative approaches. He explained:

“We have developed an alternative approach where the PPF remains a “backstop”, but providing 100% cover.

This would mean that pension schemes would remain open with the safety net set set no lower than the equivalent benefit given up, if the sponsor went bust.  Here the PPF levy becomes an insurance premium covering scheme failure (As in the Brighton Rock model) with the premium set around the amount of risk taken within the scheme. David Wrigley comments

“Under this model, the benefits of investing DB assets could be shared across DB members, sponsoring employers and the (largely defined contribution) retirement savings of those companies’ current workforces.”

This would also be handy for trustees and their advisers who would only have to hand over the keys if things went wrong. If the PPF provides equivalent benefits then the member is not disadvantaged and the only question is what premium the sponsor has to pay to the PPF ongoing and what excess they pay for or a bulk transfer of assets and liabilities.

Of course this will have profound implications for the large number of DB schemes that aren’t so set on buying out with an insurer that a plan B doesn’t come into it.  LCP itself has been running seminars for small and DB schemes struggling to get bandwidth with the insurers and currently skulking at the back of a long queue.

But the PPF is not the only new entrance. Nausicaa Delfas (TPR CEO), speaking at PP Live earlier this week told her audience

Buy-out may be the answer for many DB schemes, as they will have seen their funding positions improve in recent times. But that market is likely to be constrained and some will prefer a different path. We think the market for innovation and new models in DB has been developing and brewing for some time, including the introduction of Superfunds, and we expect trustees will have more options available to them in the coming years.

Read into that what you want, but if I was advising a DB scheme on buying out now, I would be bringing this statement to their attention and I’d be bringing this blog to their attention too.

Does Steve Hodder have a crystal ball?

When Steve Hodder of LCP spoke to Pension PlayPen ‘s coffee morning , did he know that the Government had it in mind to restructure the PPF – or did he put that thought in the Chancellor’s mind? You can check out his comments in this important video.

“The market for innovative new products”

If Nausicaa Delfas knew of the Treasury’s cogitations over the PPF, then this proposal may have been one that she saw “brewing for some time”. I suspect that the PPF and other Government controlled  pension schemes have been in the Treasury’s line of site for some time.

I doubt that uppermost in Jeremy Hunt’s mind this weekend is how DB surpluses are shared. I suspect what he’s interested in is at getting as much of the £1.5 trillion that DB schemes aren’t investing productively, back into British industry via vehicles such as Nicholas Lyons’ “Future Growth Fund”.

But let’s stick to the focus of this blog – which is protecting the PPF and members, both  of which are key objectives of the Pensions Regulator. Protecting schemes is not a key objective (though trustees might wish it were).

The Pension Regulator only carries out orders, it does not set them , Delfas’ speech sounded a clarion call but what challenge is being met, will depend on who and what “we” are.

“We must unite to meet the pensions challenge” — Nausicaa Delfas

Whether the plan for the PPF is to make it a better backstop or a consolidator is largely academic if this Government cannot get legislation in place by the end of this parliamentary term.

If it doesn’t, then the plans will carry over to the next Government of whatever hue. It may be that they find merit with another party or parties but I suspect that this discussion is more about positioning for the 2024/25 Conservative manifesto , than for immediate release!

That said, the touchpaper has been lit. What LCP were discussing theoretically , now looks less of an abstraction. The PPF is (IMO) under used and under valued and it is good to see it getting attention in the press and in number 11 Downing Street.

Most of all, it’s good if this debate puts a break on buy-out. Inflation and high gilt-yields don’t look like going away soon, so we have time to consider other options than insurance. Superfunds and the PPF both have a part to play.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to What does the Government really have in mind for the PPF?

  1. John Mather says:

    What doe the Government plan for the PPF?
    A cynical money grab to prop up failed policy

    I am in Amsterdam and The Hague for the Vermeer exhibition

    if the U.K. Government left the Westminster bubble and looked at how the railways and public transport works here they might become useful

    • Adrian says:

      What, and admit it could do and be better…..that sounds like a climb down no government would agree to.

  2. Peter CB says:

    “the PPF and is now a surprisingly successful enterprise that beats all the targets set for it and is fast reducing its levy on the industry as it moves to self-sufficiency.”

    Surely no small part of the PPF’s ” success” lies in the use of mark to market valuation models both to draw contributions out of the company into the pension scheme and also in the PPF own assessments of the need to admit the scheme.

    Both the valuation of the scheme’s assets and the assessment of the liabilities are entirely dependent on highly volatile spot measurements, often influenced by market factors which have no relevance to the long term sustainability of the cash flows of the pension scheme.

    Dealing with the PPF assessments first: “The valuation under section 143 will determine whether the scheme has sufficient funds, at the relevant time (here, the date immediately before the qualifying insolvency event), to pay at least the Pension Protection Fund levels of compensation” .(PPF s143 Guidance Notes). I note that the Carrillion pension schemes are still under assessment by the PPF and running on after more than 5 years as a closed scheme, presumably to allow assessment of any receipts from the liquidator. Looking at the Company’s accounts before the liquidation it looked as if the pension scheme was reasonably well funded (at least to PPF benefit levels) with or without any liquidation receipts. If the Scheme was valued using todays valuation assumptions it would surely be showing a large surplus. However for PPF purposes it will be valued using the factors that applied in January 2018 and it is much less clear that it would have been in surplus on that basis. In this proves to be the case it is the PPF that profits from the use of valuation assumptions that have now proved to be inappropriate .

    The recent scandal concerning the USS, also clearly illustrates the effect of using contemporary valuation assumptions with no consideration of their applicability to the long term future permitted. The USS is indeed fortunate that the employers were in a position to continue to support the scheme and then to reverse the changes made and reduce ongoing adverse effects on Members, but at what cost to the education system, industrial relations, and credibility of employer pension provision? Private sector companies in a similar situation are unlikely to consider that they have the freedom to meet deficit recovery contributions required by a Regulator tasked with protecting the PPF based on one day spot measure based valuation assumptions about the future. As a result the only option was to liquidate and force the Scheme into PPF assessment for admission or buy-out.

    I do wonder if the scandals, such as BHS, would have occurred if the assessment was based on a future cash flow assessment of the scheme including the requirement to sell capital assets matched to market valuations assumptions for that particular tranche of to assess the year by year employer contributions required to allow the Scheme to meet its duty to pay the benefits as they fall due while maintaining an appropriate asset base generating income for the longer term future..

    • Peter CB says:

      Sorry – final sentence should have read:
      … including the requirement to sell capital assets matched to market valuations assumptions for that particular tranche of asset sales to assess the year by year employer contributions required …

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