The Government have twice set up pension schemes this century to meet market need. The PPF was set up to provide a life-boat for pension schemes that lost their sponsor and Nest was set up for employers who couldn’t find a provider to offer them a workplace pension.
Both the PPF and Nest have been successes and the Government is now asking whether it could complete a notable hat-trick by setting up a superfund to consolidate pension schemes that have run out of puff.
They are asking a number of questions as part of a call for evidence on DB options. You can read the thrust of my response to this consultation here
The Government is asking
What impact would higher levels of consolidation in the DB market have on scheme’s asset allocations? What forms of consolidation should Government consider?
It’s clear that consolidators would be able to go harder for longer when it comes to investing in productive assets – which is one reason why the Government is encouraging consolidation. This is not just a case of scale, it’s a case of mindset, if a superfund sets out with a mindset of staying around, then its time horizon is different from that of a trustee of an occupational scheme being badgered to get to buy-out or self-suffeciency, locking down assets in de-risking strategies
The Government goes on
To what extent are existing private sector buy-out/consolidator markets providing sufficient access to schemes that are below scale but fully funded?
The answer is – they aren’t. The only way out of an occupational scheme that is considered “below scale” – (e.g. not a commercial opportunity) is to wait in a queue the front of which the trustees cannot see. Because of the proposed gateway, such a scheme cannot knock on the door of a superfund and is therefore in the hands of the insurers.
What are the potential risks and benefits of establishing a public consolidator to operate alongside commercial consolidators?
Creating a public consolidator does nothing but increase the frustration of well funded but sub-scale schemes. Unless the gateway is removed , they will continue to stand in the queue for buy-out. For under-funded schemes, a public consolidator is competing against superfunds (as Nest competes against other master trusts). It is possible that the extra capacity and laxer underwriting terms of a public consolidator might attract stragglers but it’s not immediately clear when the PPF might consider the public consolidator was simply eating its lunch. The risks of having a public consolidator is that it becomes too successful and stymies the private sector or has no business and is crowded out by more commercially attractive consolidators and insurers. These are Nest-like issues, they can be avoided, but there has to be a clear market opportunity (as there was with Nest). I don’t see that opportunity.
The final risk is that the public consolidator is left with a stated or unstated obligation to clear up the mess of schemes that nobody wants (another Nest like risk). I don’t see such a risk developing, the PPF is there for that.
And the Government goes on
Would the inception of a public consolidator adversely affect the existing bulk purchase annuity market to the overall detriment of the pension provision landscape?
If the public sector consolidator was able to compete with insurers (by avoiding the Gateway) then it could be a threat to insurer’s current hegemony. But that would be to the detriment of pension superfunds who have so far been given no opportunity to do business, because of fears of competition from insurers.
I feel very strongly that all consolidators should compete on the same terms (as happens with Nest). So the threat of a public consolidator should be to insurers and consolidators (if the gateway is taken away) or just to consolidators if it isn’t. A public consolidator should not be given preferential market access.
The Government then turns to investment
Could a public consolidator result in wider investment in “UK productive finance” and benefit the UK economy?
Providing the public sector consolidator was allowed to and had the guts to invest in productive finance, it would assist in the development of productive finance, unless it so cannibalised the consolidator market that it stopped commercial consolidators investing at all. In that case, the public consolidator would have done what Nest set out not do to, destroy a competitive market.
The Government then ask
What are the options for underwriting the risk of a public consolidator?
Again the model is primarily Nest. The Government can fund the consolidator out of the public purse by means of debt supplied by the DWP, or it can seek finance to back up promises from the private sector, making the public consolidator a public/private partnership. The only other partner in this enterprise might be the PPF which is fast becoming so over-funded as to be a potential underwriter of the consolidator. This of course is another public/private partnership as the PPFs money is already underwriting private sector schemes and funded with private sector levies.
To what extent can we learn from international experience of consolidation and how risk is underwritten?
I am not aware of other countries that have tried this public sector consolidator enterprise. I will duck this question and hope that other correspondents to this blog may help me out before I submit to Government!
Is there any need for a public sector consolidator?
If the Government continue to stymie pension superfunds, you can answer the question “yes”, but that means simply taking pension superfunds into a public/private partnership of adding DB pensions to the public sector balance sheet. I don’t think that’s a good idea.
If a public sector consolidator is to compete with superfunds, it must be in a wider pool than the pension superfunds are currently being promised.
If the gateway is abolished, there is sufficient scope for all kinds of superfunds to compete with insurers. Which is my preferred solution.