Laura Trott has said she is aiming to level up DC to DB

When Laura Trott arrived in post she called up a few people who Guy Opperman had suggested to her and told them she intended to narrow the difference between DB and DC outcomes. I was one of them. Frankly, I thought this was fanciful. I have continued to ponder her words but today I read an extraordinary document from her, that represents a 180 º turnaround from the noise coming out of her Pensions Regulator for the past two decades.

We are asked to consider this statement

Incentives for employers to invest for surplus are currently quite weak. Employers have little to gain from any surplus, their access to which is strictly limited, and  they are entirely responsible for any deficit that might emerge if investment does
not perform well.

The document is entitled DB options and is

“a call for evidence to support the development of innovative policy options to increase protection for DB members while supporting wider economic initiatives”.

The call if for evidence supporting DB schemes investing in productive capital. This seems  so far away from the objectives of TPR to protect DB members that I originally thought I might be reading a spoof.

It is also challenges the fiduciary duties of trustees and potentially undermines the stability of the gilt market, gilts needing to be swapped for private equity and venture capital were these innovative policy options to be adopted.

Most of all , it challenges DB Trustees to think beyond their members and to consider how they can invest  to create and  share surpluses with the sponsor and its staff and their DC plans.

A year ago

During the summer of 2022, we were enduring a tortuous leadership election and a slow inexorable rise in gilt yields. The growth assets of DB schemes were being sold to meet collateral calls from LDI funds. When the election was won by Liz Truss the sale of productive capital escalated to a point where many schemes had nothing left to sell and had to abandon their hedges. Lack of liquidity was blamed as part of the crisis.

This consultation asks what are the barriers to DB scheme investing further in illiquid assets. This must be creating a hollow laugh from trustee boards with nothing left to sell but illiquid assets. The estimated £600 billion pounds wiped off the collective value of corporate DB plans in the UK in 2022 was almost entirely down to the strategy of de-risking schemes to the point where they might eventually be self-sufficient or even capable of being bought out.

A year on

This consultation looks at alternatives to buy-out that would enable occupational scheme trustees to pass on their assets and liabilities to organisations that can invest productively. Organisations that have been frustrated for half a decade – the putative superfunds and an organisation that until recently was considered a lifeboat – the PPF.

It asks about raising the benefits payable by the PPF so that there is an incentive for occupational schemes to invest for growth, creating the moral hazard that heads the members win, tails the members get full benefits paid by the lifeboat. An idea pioneered by LCP is now being consulted on by Government.

Lest we forget

Wind back the clock to late 2020 when the Pension Schemes Act was getting its final reading and we can remind ourselves of Peers of the Realm pleading for schemes such as USS and Railpen to be allowed to stay open for new accrual. Then the concern was that these schemes were gaming the PPF, today they are the Government’s poster children – some of the few DB schemes still aspiring to grow.

We should not forget the considerable pressure put upon any scheme that resisted LDI, Railpen among them. The pressure was coming not overtly but covertly from the Pensions Regulator.

In calling on trustees to consider a growth agenda, the DWP must remember that until very recently these trustees were demanding large deficit contributions from employers to plug funding gaps created by a strict adherence to accounting standards and the tyranny of the gilts based discount rate.

While insurers stalk the earth

While this consultation is launched, BP’s £30bn pension fund is in advanced talks with insurers to offload its assets and liabilities in return for an insurance policy that promises to pay BP pensioners from funds that are constrained from investing in productive finance by solvency regulations. I am informed there are two other schemes with £20bn+ assets also engaging with buy out.

What kind of a crazy mixed up world do we live in that trustees can be considering how to invest for growth with one hand and negotiating away their assets to annuities with the other.

Never too late!

Will the Government intervene in the wholesale destruction of value which will be occasioned by the sale of schemes to insurers? Will trustees pull back from the brink? Will Superfunds and the PPF offer alternatives?

This call for evidence only lasts 8 weeks.

Laura Trott sounds like she hasn’t got a day to lose

I hope that reiterating the government’s support for superfunds, alongside TPR’s interim review, and committing to having a permanent regulated regime, as soon as parliamentary time allows, will help to maintain momentum and investor confidence and cement the legacy of this important innovation.”

And what of all this surplus generated? Well there’s plenty of hungry DC mouths to feed! And maybe a CDC plan to be created.

Laura, I finally get it!