Correction – the tax payer does not guarantee the PPF

I was surprised to read an article in FT’s Alphaville that misunderstood the PPF to the point that its author could write on twitter

“The “public sector consolidator” idea is full of holes. The big one is the only guarantor” would be the government. There is no one else. This would be a huge policy change. Why should taxpayers start guaranteeing hundreds of billions of £ of private sector DB pensions”

This is simply not the case. Nobody guarantees the PPF’s benefits are paid in full. The mechanism in place were the PPF to find itself unable to meet its promises is for the PPF to ask parliament to reduce the benefits payable and this is done in law. There is no recourse to the taxpayer and – more importantly – there is no guarantee.

This may come as a shock to the author and indeed to many readers, but the PPF is infact a form of CDC where the contributions are defined by the levy and the pension is paid on a best endeavours basis.

If the PPF were to be a consolidator, and I think it would like to be, it would have to consolidate on the same basis . The Government has thought about this and in its consultation questions whether there is a risk that any reduction in benefits would be specific to schemes that were consolidated on a voluntary basis and those that fell into the PPF after assessment.

So I think it  likely that the PPF, because it is the backstop to itself, would have to declare that it was operating without a safety net. I agree with the FT that to deem the taxpayer the insurer of last resort would be a huge change – but no one is suggesting that.

Looking for guarantees where there are none

 It really is about time we came clean with the public that the pensions we operate, including the state pension, are not written in stone. Even the public sector pensions which are regularly referred to as gold plated, have had their gold plating chipped. The Government was able to change the basis of indexation from RPI to CPI for instance. The State Pension, as WASPI points out, is paid based on fairness to differing generations and there is no fixed state pension age, the triple lock has lasted some time but it is not expected to last for ever.

There are certainties (death and taxes) but pension pay-outs aren’t dead-certs at all.

Chasing after the certainty of a guarantee is a dangerous business. Guarantees have sunk insurers like the Equitable and will do so in the future, this may be what the FT has had in mind but the Equitable was not bailed out by the taxpayer. Failure is a risk you take and what compensation schemes there are (FSCS) do not guarantee on a limitless basis.

People would be much better accepting that guarantees strengthen promises but that promises are ultimately best intentions. Even Government fails, as the citizens of Birmingham are finding out.

But leaving philosophy behind, let’s get back to consolidators and the promises they make. Commercial consolidators – the one that’s approved is Clara, the other is Pension Superfund are not covered by FSCS but by the PPF – as are other private sector occupational DB schemes and the PPF pays pensions on a best endeavours basis.

As my friend Bob Compton reminded me yesterday, those already in the PPF are dependent on the PPF’s good management for their benefits to be paid and we can be proud that so far, the PPF has been well managed to a point where it has a healthy surplus of assets over liabilities and is increasingly looking self-sufficient of the levies it still demands.

Whether , having achieved the results it has, it considers it should now be more ambitious is in its prerogative. It can and is asking to do more and it could fuel up for doing so by increasing the scheme’s risk appetite towards levels expected of a scheme “going for growth”. But doing so would be to pass extra risk to those members who are or are about to be in receipt of PPF pensions and that really does require commensurate upside to the members.

Paying members bigger pensions on the basis of there being money to do so , while warning that failure could mean a drop in pensions is precisely the bargain that Royal Mail CDC members are being asked to take. It is ironic that Britain’s first and biggest CDC scheme is not Royal Mail but the PPF.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Correction – the tax payer does not guarantee the PPF

  1. jnamdoc says:

    This is building nonsense upon nonsense.

    Govt is tying to find a solution that need not exist.

    The TPR remit to protect the PPF (at any cost, even idiot premium gilts minus pricing ) led it to scare schemes witless into “derisking”, while also creating a wedge between schemes and the employers (who became seen as the enemy), and the schemes were thus starved of the best talent (the number of schemes bailing out to OCIO is testament to that).

    The TPR has no remit whatsoever to improve or maximise workers pensions.
    Just change the remit – that will lead to a mindset of taking acceptable prudent risk (ie investments !) to best effect to increase workers pensions.

    Suggesting that PPF a govt quango should take and invest the sssets (because the schemes won’t) is looking at this from a statist perspective. Get rid of the simple block in the road, rather than build a tunnel under it

    It’s the remit that done us all in. Fix it!

  2. John Mather says:

    Sound bites have for years replaced critical thinking. Pundits assist by giving a platform to echo the sound bite. Examples Equitable does not pay commission ( it paid volume related salaries) inference commission bad Equitable good.

    DB gold plated yet thousands of failed schemes in the PPF inference DB good DC bad

    VFM and CDC imply that ALL can move to a more beneficial position in a normal distribution

    The solution is not to be found at the level of thinking that created the problem. However an industry has a vested interest in sustaining the status quo

  3. jnamdoc says:

    Benefitting from a re-read – poweful / well drafted concluding paragraph, Henry.

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