Good job PPF

Imagine running a business where you can’t stop charging your customers and your customers can’t stop paying you. That’s the Pension Protection Fund,  a public corporation, set up by the Pensions Act 2004,  that has been protecting members of eligible defined benefit  pension schemes across the UK since 2005. The PPF’s problems are all about over-funding and over-charging. It is becoming a victim of its own success.

It’s reached the top and had to stop

The PPF’s problem is that while the amount it charges these schemes is falling, it cannot countenance reducing the levy much further without falling foul of the rules set it by parliament at its outset.

It is proposing a

• £100 million levy estimate for 2024/25, down from £200m in 2023/24 and £390m in 2022/23, meaning that
• The levy PPF aims to collect has been reduced by almost 85 per cent since 2020/21 and
• Almost all levy payers are expected to see their levy fall compared to the current year.
• It’s launching a consultation  on the 2024/25 levy rules 

The seven-week consultation is seeking stakeholders’ views on the proposed levy estimate and PPF’s approach to future levy collection. As the PPF’s latest Annual Report and Accounts highlights the PPF is in a strong financial position and its funding position has improved over the year. Consistent with its funding strategy outcomes published in Autumn 2022, the PPF is continuing the process of transitioning to a lower levy.

Although the risks to the PPF are currently lower, particularly as scheme funding has strengthened, the consultation explains that the PPF’s governing legislation makes it necessary to continue to collect a levy to mitigate against any unexpected funding challenge. There are legal limits on the extent to which the levy can be increased from year to year (a maximum increase of 25 per cent), effectively preventing the PPF reducing the levy further.

Oliver Morley , the PPF’s CEO explains

“The current legislation was intended to protect levy payers from sharp increases in the levy; however, it also effectively constrains how low we can allow the levy to fall without damaging our ability to respond to a funding challenge should one arise.  We therefore plan to ensure the levy remains at or above £100 million in future years.”

The consultation indicates that a small increase in the levy scaling factor is needed to achieve a levy of £100 million in 2024/25, but the PPF expects 99 per cent of levy payers to see their levy fall compared to the current year.

The PPF anticipates that more substantial changes are likely to be necessary to maintain a levy of £100 million in future years.

The tweaking is because the levy is infact two levies , a scheme based and a risk based levy and the two get out of kilter if more and more schemes aren’t at risk. That concentrates the risk based levy on a small group of schemes who between them have to shoulder a fixed percentage of the total levy.

This consultation, closing on 30th October 2023, seeks views on the proposals for 2024/25 but also on the options to distribute a £100m levy between schemes in future years.

Of course, so long as there is inflation, a steady £100m levy will mean a reducing levy – in real terms. Even so, the levy represents an annual contribution of nearly £2500 a member supported by the scheme, that’s a lot more than many DC savers get as a total pension contribution and there will be questions asked about why the £100m levy has to stay.

In its consultation, the  PPF should consider becoming self-sufficient – accepting it doesn’t need pocket money from Mum and Dad anymore.

How low can you go?

The PPF is doing very nicely thank you. The PPF is one of the UK’s largest asset owners with £32.5 billion of assets under management which back the pensions of 440,000 of us.

As well as profiting from the growth in its assets, the PPF can recover money from administrators – owing to the insolvent employer’s pension scheme. It is aided by the Pensions Regulator which has as one of its statutory objectives, to protect the PPF (a bit like standing guard outside Fort Knox).

In investment terms, the PPF is stuck in second gear, it only invests 30% of its assets in growth assets (compared with a typical DC/CDC plan’s 60% ). Ironically, its only investment blemish was its participation in LDI which it now admits it used for too long, losing a bundle of assets in 2022 to collateral calls when gilt yields spiked.

The DWP is proud of the PPF, it commissioned a report into it last year which concluded

I have found the PPF to be a well-run public body offering high standards of service and value for money to those who use it and pay for it… It is well-managed and well-governed and is highly regarded by the full range of its stakeholders.

Now, the  Government would like the PPF to invest more heavily in productive finance and with an ongoing levy, it has every opportunity to do so. The levy provides the liquidity which is lost if investing in long term assets.

But growth in assets – outstripping growth in liabilities leads to more problems!

What happens if you grow too fast?

Like any healthy youngster, the PPF’s growth has found it growing out of its clothing.

https://www.ppf.co.uk/annual-report

It has more than £12bn more than it needs to pay its pensions and this “buffer” has probably grown from this last estimate.

So the PPF is faced with a problem of how to get rid of this surplus. Does it give members a bonus (a bad signal to the market that the PPF is a cushy number)? Or can it find other things to do with the surplus like becoming a semi-commercial consolidator (with the same issues Nest has over competition)?

The levy increases the problem the PPF has with distributing its wealth.

What happens if it all goes wrong?

You might well ask why any scheme with a £12.1 bn surplus needs to be supported by levies. The reality is that once the levy falls below £100m, it becomes, under the rules set for it, pretty hard for the levy to increase.

The risk-based culture that is at the heart of what the PPF does, sees this as like turning off the life-support mechanism which would pump money in if the PPF went very wrong.

Actually, the PPF could go very wrong and still survive without recourse to increased levies or a call on the DWP that set it up. It can do so by simply cutting the benefits in payment (with the consent of parliament).

The PPF assumes it will always need a levy (and a levy of £100m). In the light of its healthy surplus, its successful investment strategy, its intent to invest more productively and the protection it receives from the Pensions Regulator, I am really not sure that it needs any further funding.

Ultimately the PPF is a CDC scheme – it guarantees nothing but to deliver its best endeavours to pay benefits. There is no PPF to the PPF.  It has grown into a fine young adult but is still getting a stipend from the schemes it provides comfort to.

That stipend comes from other people’s pensions . It may be time that the healthy child loses its pocket money, the PPF could do with being less needy.