I have twice blogged on the DWP consultation on DB consolidation and will continue to do so, mainly because this is a matter of importance but mainly because I suspect I will approach this rather differently from those directly involved in buy-out , consolidation or advice to DB trustees and/or their sponsors.
The Tony Blair Institute has suggested that the PPF can become a consolidator competing with superfunds and insurance companies, for the offloading of private sector DB pension liabilities. The FT has reported
The TBI’s proposals would see the Pension Protection Fund, the UK’s £39bn lifeboat scheme for corporate pension plans, take a much expanded role as a fund consolidator, a move that would require a change in legislation.
This blog deals with the section of the consultation (Q17-20) that questions whether the PPF should become a consolidator. The PPF does of course consolidates, there are many schemes in the lifeboat, but the DWP are suggesting that the lifeboat might be re-purposed as a cruise liner – at least for schemes who want an alternative to commercial consolidators and insurance buy-out.
My thoughts are that the PPF can offer consolidation of benefits offered by occupational schemes as an insurance against failure of a scheme in run off. In return for a super-levy, the PPF could – in a reinvented form – become a consolidator of last resort.
The DWP consultation questions are in bold
What are the potential risks and benefits of the PPF acting as a consolidator for some schemes?
The PPF is in sufficiently rude health to take on considerably more risk than it currently carries. The risk of the PPF competing with superfunds and insurers is that it introduces unfair competition into the market, as was recognised with Nest when it entered the workplace pension market. While Nest had the competitive advantage of a DWP loan, the PPF has the advantage of ongoing cashflows from the levies that it has and will collect that make it super-solvent and therefore able to compete at a competitive advantage.
This is not a reason for it not to compete for business, but whereas Nest has a public service obligation to take on business unacceptable to private providers, there is no such obligation for DB schemes to consolidate. So the PPF needs to demonstrate that it would be in the public interest for it to compete and the CMA will need to be convinced that it is competing on a level playing field, if the Government is not to be accused of fielding a ringer.
Would the Board of the PPF be an appropriate choice to operate a public consolidator?
I’m owning up to knowing a few of the execs and non-execs and I happen to think them very good appointments. That’s of course no reason to call the board an appropriate choice but it does seem that the PPF has the capacity to attract good quality people.
More generally, the PPF board is having an easy time of it right now and could be stretched to provide more , for the talents it has. Both the PPF and its board are under-employed.
How could a PPF consolidator be designed so as to complement and not compete with other consolidation models, including the existing bulk purchase annuity market?
What is wrong with competition? If the PPF were enabled to set up as a consolidator, it should be allowed to compete, as Nest competes, against commercial rivals.
However, the competition process is different for DB consolidators. The PPF would compete in the market as asked , not automatically. Necessarily, it would compete in a different style and with a different brand from its competition. Such competition should be welcomed , provided the PPF were not advantaged with public subsidy. I do not propose any further “gateways”, indeed I’d like to see an end to gateways which are protectionist and anti-competitive.
What options might be considered for the structure and entry requirements of a PPF-run public consolidator, for example:
- are there options that could allow schemes in deficit to join the consolidator?
Schemes in deficit can join the PPF if the sponsor can no longer support their obligation to make good the deficit. The PPF is a consolidator in its current incarnation. But there is a simpler way for the PPF to be a consolidator. LCP’s proposal is that sponsors can pay a super-levy to the PPF to allow the PPF to take on the scheme’s liabilities and assets in deficit and make that deficit good. This seems the optimum role for the PPF as a consolidator as it gives it a unique status. allowing schemes that wish to “run on” to do so with confidence, operating a growth strategy on its assets.
- what principles should there be to govern the relationship between the consolidator and the Pension Protection Fund?
There is no reason why the PPF should manage is current Fund and the Fund segregated to pay pension benefits in full any differently.
- should entry be limited to schemes of particular size and / or should the overall size of the consolidator be capped?
The PPF should be allowed to compete as the long stop for open schemes without any cap on its size.
- how could the fund be structured and run to ensure wider investment in UK productive finance?
I cannot comment on the legislative changes that would need to be made to PPF’s constitution but I understand that these would probably require primary legislation. As regards the management of the fund, then I would hope its current management team could adopt the changed mindset promised at the Pensions Regulator.
- how to support continued effective functioning of the gilt market?
I can understand nervousness that a shift from a liability driven approach to investment to an approach that focusses on maximising the productivity of pensions money. However, any movement , resulting from open schemes and closed schemes looking to run off with the backstop of the PPF as a consolidator will not move the dial on the great stock of gilts retained in occupational schemes. The threat is not from consolidators which invest more productively, but from insurers who typically swap gilts for other sources of reliable income when buying out occupational pension liabilities