The FT sees a backlash from business as Pension Protection Fund’s reserves swell to more than £12bn. 

The PPF is consulting on halving its levy from £200m to £100m pa, but many are saying this is too little and that the plan to keep the levy at £100m is unnecessary. Employers point to the PPFs £12bn surplus as “prudence” enough.

The FR attributes the £12bn surplus to fewer than anticipated claims and good investment returns. But the underlying cause is a failure of nerve within the pension system.

The PPF is infact a victim of the excess tenderness shown to it by the Pensions Regulator and a more general malaise that has required employers to fund DB pensions as if every day were their last.

The admirable management of the PPF has led to it becoming independent of fund managers, advisers and external administration, improving performance net of fees and creating a highly efficient machine that converts assets into pensions with a minimum of fuss. It has proved itself more than capable of looking after itself,

My view is that we still treat the PPF as a fledgeling, but it is flying like an eagle. But it does not see itself that way.

The question  for the PPF is how to reduce its dependency on levies without severing a lifeline to ongoing revenues. It argues that if they fall below the proposed £100m next year, the umbilical will be damaged beyond useful repair.

The PPF “is limited by law from increasing the levy by a maximum of 25 per cent year-on-year. This potentially exposes it to risks in bad years if it cut the levy too far”

A #pensions law of unintended consequences. https://t.co/RTg5Q4xhWc

— Mike Harrison (@HigherEdActuary) September 20, 2023

Nature would argue that umbilicals outlive their purpose quite early in the lifecycle!

Employers rightly begrudge having to pay any risk premium  to an organisation with such a supposed surplus and argue that they have to take risks in running their business while funding the PPF to ridiculous levels of prudence.

You can see their point.

An excess of tenderness

The Pension Regulator famously has as one of its key objectives “to protect the PPF”. It sees its business as to bully employers into funding deficit contributions, trustees to adopt low-risk investment strategies and it has gone to extreme lengths to keep schemes out of the PPF. Examples include the regulatory apportionment agreements for BHS and BSPS, which have worked in allowing the schemes to swerve the PPF but at huge cost to third parties.

The Pension Regulator’s fervent pursuit of this objective has led to contagion among trustees and their advisers. The chief victims of schemes going into the PPF are of course those with the largest deferred benefits, these are often the senior management of employers who are perversely incentivised to go along with “avoid the PPF at all costs” strategies.

The result is that the PPF is doing its job, but taking less risk than it ought. It is a victim of an excess of tenderness. It is a half full hospital ward.

The urge to re-risk

The PPF is now being called upon to take more risk on all sides, Former pension minister
Steve Webb, agrees reform is needed telling the FT.

“The government should simply change the rules which would free up the PPF to make further cuts in its levy”.

But the rules governing the levy are there to provide a degree of certainty not just to the PPF but to employers and the Government has a lot more pension issues on its agenda than to tend to the funding of its lifeboat.

Webb’s firm are at the same time calling for the PPF to introduce a super levy, which the PPF has proposed would be set at 0.6% of liabilities, to provide schemes with the capacity to do what they like with their investments in return for a promise that if things go wrong, the PPF will pick up the entirety of the member’s benefit promise.

The PPF is also looking for more risk to be taken, but this is in another direction.  It wants to become a consolidator of last resort for schemes that can neither sell their assets to an insurer and wash their hands of liabilities, or soldier on under their own steam (with the backing of a sponsor).

The problem with becoming a consolidator is that this too would require Government to rewrite its rules. At present, if the risks within the PPF overwhelm it, it has recourse to reducing the benefits payable to all members. I have described this unlikely option as making it operate as a CDC scheme.

To find an insurer of last resort , the PPF would need a Government backstop. That would require legislation and it’s precisely that legislation that the Pensions Regulator set out to avoid with its “excess of tenderness” approach.

Should the state  take more  private pension risk?

In a well-timed article in FT Alphaville, Toby Nangle asks

Who’s going to backstop a UK public sector pensions superfund?

and comes to the conclusion that there is no other way for the PPF to take on a proactive role as a consolidator than to seek a tax-payer guarantee. The tax-payer does issue such guarantees

British Coal’s pension scheme is nationalised as are large parts of the Royal Mail’s pension.

The Government bailed out the British banking system by taking on large parts of it in 2008.

And of course the Government has undertaken to pay defined benefit pension to millions who have or still work in the public sector.

While it is politically hard to see a Conservative chancellor lending our balance sheet to the PPF, it is not beyond a Labour administration.

But as Nagle points out, any consolidator is a bad consolidator for the powerful insurance lobby

From commercial insurers’ perspective, a public superfund with a government guarantee could be a formidable competitor to their bulk-annuity business.

Indeed – any kind of intervention runs the risk of driving a coach and horses through the Mansion House reforms.

If .. the cost of a government guarantee are too low it’s hard to see why schemes would ever choose buyout over public superfund; if they’re too high it’s hard to see why they’d ever veer away from buyout. The middle-ground looks vanishingly small.

Maybe the original conception for the PPF holds good.

To my mind, the problem with the PPF is not with its management (which is good) , nor with the levy (which is excessive but not damagingly so). The problem is that the PPF has not been allowed to do its job and provide a lifeboat to schemes that lose their sponsor.

There are plenty of entrepreneurs waiting in the wings to take on pension risk, without the overly engineered RAAs favored by TPR in the past. Where superfunds and capital backed journeys will not tread, the PPF picks up the pieces.

There will come a time when the PPF wants to sever its umbilical cord and abandon protecting its levy but that time does not appear to have arrived. To abandon its levy, the PPF would have to come clean on the answer to Toby’s question and agree that the protector can protect itself.

But that will mean coming clean about a risk that the PPF is currently running, that it has nothing behind it but its own best endeavours.

As this blog has said many times, we are all dependent on our best endeavours to some degree and a more open conversation about risk-sharing is to be welcomed.