Should the PPF be more than a lifeboat?
There is nothing new about calling for the PPF to be more than a “lifeboat”. It is a Government pension success story and has delivered on its objectives to provide security to those who find their pensions adrift – when the employer goes wrong.
But recently , the PPF has been imbued with salvage powers that go much further. the Tony Blair Institute has called for it to consolidate the long tail of private sector DB plans to release employers to do better things and ensure that assets and liabilities are managed more efficiently.
Speaking to the RSA last night, Michael Tory stated that the PPF had the three things needed to “invest in our futures” 1) scale – 2) long time horizons – 3)investment expertise. The Tony Blair Institute wants the PPF to hoover up all small DB schemes (<£100m).
In theory this makes sense, but in practice – it looks unlikely to happen, not least because there is no more appetite to hand over the DB keys to the PPF than the DC keys to Nest.
Darren Philp voices concerns of many.
The PPF have now published their thoughts on what they could and should be doing , as a result of the Mansion House reforms.
While the PPF might not be the consolidator, it thinks it could serve a role alongside others.
The PPF relishes the prospect of being a consolidator
It is a punchy document and makes it clear that its authors relish the prospect of snapping up the “unconsidered trifles” that other consolidators leave behind
Commercial consolidators have not yet completed a transaction. Our understanding, including from anecdotal evidence from our SME Forum , is that commercial consolidators are primarily interested in larger schemes in order to achieve scale as rapidly as possible.
The commercial consolidators ( of which only one is an approved superfund) are struggling to find a commercial opportunity to consolidate. They have no means to extract profit from their activities, they are restricted by a Gateway from competing for business and most of the technical problems surrounding TPR’s 2020 regulations , have yet to be addressed. It is not a question of being picky, the consolidators have – at present – nowhere to go.
I suspect that were they given scope to consolidate, they would not be as picky as the PPF believes. Which means that the PPF would need to compete for smaller schemes. This is highly problematic for a Government keen to promote an open market, the PPF have a mandated revenue stream through levies which is every bit as advantageous to it as the subsidised DWP loan is to Nest. Nest has not become a competitive DC consolidator for reasons of competition and I think it unlikely that PPF would either.
The PPF does not want to guarantee benefits – even with a super-levy
While the PPF response blows hot on consolidation , it blows very cold on the prospect of protecting 100% of scheme benefits, where a scheme wishes to stay open. This is an idea proposed by LCP and assumes a super levy could be payable to protect the members of a DB scheme from the “haircut” in pension benefits that would otherwise arise if a scheme sponsor failed while a scheme was technically insolvent.
For LCP, this approach would allow schemes to stay open for longer and pursue more aggressive investment strategies even when closed. The PPF pours cold water on this. It suggests that the “super-levy” would be substantial.
we estimate the levy (on top of the standard PPF charge) would need to raise at least 60bps of the total buy-out liabilities of participating schemes each year. Individual scheme levies would be higher or lower depending on their specific credit worthiness, funding level, and investment strategy.
The PPF reckons this would be too high a price to be paid by sponsors looking to use their pension schemes to pay better DB benefits, improve DC or simply extract surplus for corporate purposes.
Since the PPF is largely self-determining its levy- revenues, it calls the shots here.
The PPF has asked me for my views on their views, which is flattering. I am having a chat with them later in the week but don’t see why I shouldn’t air my thoughts in advance, especially if I get some useful comments from my better informed readers (better informed than me that is).
- Until they sort out the role of the commercial DB consolidators, Government shouldn’t be inviting the PPF to do anything.
- The PPF are right to support commercial consolidation through superfunds as an alternative to insurance (and I suspect they do want to see choice and the end of the Gateway)
- The PPF clearly don’t want to guarantee “no loss” to occupational schemes and don’t believe that there is a market for doing so. There arguments are compelling as it is hard to know to what extent LCP’s proposals are “wish fulfillment” and to what extent based on market dynamics.
- If a viable market for commercial consolidators is created then the DWP is faced with three options – keep the PPF’s role as is, allow it to consolidate in a defined space or allow it to guarantee 100% of scheme benefits, it’s one of three IMO
- It is good to see the PPF actively engaged in this conversation and putting its views on the table.
The PPF estimate that at the current rate of attrition, it will take 30 years for closed DB schemes to run off. It thinks that insurers do not have the capacity to move much faster than they are doing and it makes it clear that the preparation for , transition to and operation of insurance buy-out should not become the only option for closed DB schemes.
It suggests that there is no incentive for closed DB schemes to RE-risk – even with the PPF as back-stop and it implies that the only way for the scale to be created to allow for a growth in the use of productive capital from closed corporate DB – is through consolidation.
I suspect that the PPF’s views will be welcomed more by the consolidators than by the insurers or consultants.
I suspect those listening to the RSA’s debate last night on the role pension reform has to play in boosting the economy and funding the industries of the future, will also have sympathy with the PPF’s position.