Small beer; Keating and Clacher take a sober look at the PPF

Anyone who struggles to pay attention to pensions should read no further.

There are close to 10,000 words in this article and some very deep thinking. I publish it because we have a couple of debates coming up on the issues that Con Keating raises , if you read yesterday’s piece by Iain and Con will know that they have reservations about the valuations the PPF and TPR are putting on the assets backing our DB liabilities and have called on the PPF to address these concerns before petitioning to be a consolidator



Small Beer:

A Sober Look at the PPF

Iain Clacher & Con Keating

This is a review of the Pension Protection Fund’s (PPF) submission in evidence to the Department for Work and Pensions (DWP) call on options for DB schemes. To a jaundiced eye, it is marketing material for an expansion of PPF’s remit to become a consolidator of schemes. It also shows a marked resistance to the idea that members should be paid full benefits rather than the reduced benefits currently paid.

Initial observations on the PPF

The first thing that has to be made explicitly clear is that even after 18 years of operations, the PPF is actually a relatively small scheme. PPF’s latest annual report shows pension liabilities of just £20.3 billion – it would not even make the top ten private sector DB schemes in the UK. At the time of its latest annual report, PPF represents around 2% of the PPF’s own estimate of the DB universe of £1,081 of liabilities. Its 300,000 members are proportionately a little higher, at 3% of the 9.6 million members of those schemes. Of the roughly 8,000 schemes that were around when PPF came into existence, 1,098 schemes have entered the PPF over this period. Given we have around 5100 schemes today, this means that only 38% of schemes that have left the original PPF universe actually entered the PPF.

The PPF also makes much of having paid £1.2 billion to pensioners in 2022/2023 (and it seems likely that this figure will be £1.35 billion in 2023/2024). This is 5.90% of liabilities, making PPF an extremely ‘mature’ scheme, that is to say a scheme with a relatively short residual life. This is confirmed by the relatively low decline (25.9%) in the valuation of liabilities as discount rates rose over the year. This is further supported by the PPF’s evidence to Work and Pensions Committee that: “… the bulk of our compensation is in relation to pre-97 service. 35% of our pensioners have only pre-97 service…”. With gilt yields at current levels, PPF would have a duration of less than 12 years. If it were regulated by TPR, this would place its squarely in the low-dependence, de-risked asset allocation of TPR’s proposed new funding code.

2022 was a notable year for the PPF. It was actually the first year in its 18 years of operations in which the sum of investment income (£674.9 million) and levy receipts (£385.8 million) was less than pensions paid (£1,059.7 versus £1,214 million) – a cash flow shortfall!

Over its life, the PPF has paid some £8.7 billion in compensation while collecting some £9.6 billion in levies. Over 2022, the PPF increased its holdings of cash and equivalents from £1.97 billion to £3.35 billion. Given PPF in its submission states that,

“Liability Driven Investment is a risk management strategy that would continue to be a fundamental part of our investment strategy, leading to us continuing to hold gilts more than would be seen under a pathway to buy-out, or if schemes moved to a commercial consolidator.”

we can assume that this significant shift in asset allocation is driven in large part by the need to hold cash against the possibility of margin calls on its repo and derivatives holdings, which are reported at £11.8 billion down from £13.4 billion, representing a small increase in leverage from 34% to 36%.

The PPF submission, in its response to question 1 of the call for evidence, shows the asset allocation of the universe of DB schemes, including leverage:

  • Schemes in wind-up have no leverage
  • Open schemes average around 3%
  • Schemes closed to new members around 8%
  • Schemes that are fully closed around 17%.

PPF leverage has double the leverage of schemes that are fully closed, which could be considered grounds for concern. With repo now having negative carry, this will place further strain on the liquid resources of the PPF, quite apart from the possibility of further margin calls should gilt yields rise further.

PPF benefits

PPF’s estimates of losses as shown in its annual reports, arising on entry into the PPF over its lifetime total £9.4 billion. It is reasonable to assume that with recoveries of the Section 75 Debt this will reduce by around 25%. The experience of TPR is that 1.5% of schemes in deficit, by number, can be expected to enter the PPF. However, the long tail of small schemes implies that the primary loss rate is just 0.4% of aggregate deficit exposure to all private sector DB, by value, and this will of course decline with recoveries to around 0.3%.

The experience of PPF is similar to the experience we have seen internationally with for example Sweden’s PRI-Pensionsgaranti and the German PensionsSicherungsVerein. This implies, a fair levy, for all schemes, would have been in the range 0.03% to 0.04% of scheme liabilities. This latter formulation is the mutually co-operative risk-sharing arrangement which would be supportive of schemes in deficit. The analysis indicates that the levy has raised £2.5 – £2.75 billion more than was fair (ignoring any interest accruals or charges). This overcharging of the levy should not be a surprise given the monopolistic position of the PPF. While individual schemes may contest their levy, there is no systematic review of the overall level of the levy. It does though raise immediate concerns about the desirability of the PPF as a consolidator.

We can extend the analysis to estimate to the cost of paying full benefits to existing members. We will deal with the issue of moral hazard later in the review of question responses. We commence with the cost of enhancing the benefits of members already in the PPF.

The PPF estimate overall scheme liabilities for its reduced benefits as £1,081 billion as at March 2023[1]. While TPR estimate the overall technical provisions (TPs) of schemes as £1,245 billion[2]. Full benefits (TPs) are therefore 115% of PPF benefits. The most recent estimate of PPF liabilities is £20.3 billion, giving the cost of enhancing those to paying full benefits as £3.1 billion[3], which would improve the benefits for the 300,000 members of the PPF going forward. The cost of £3.1 billion is a small fraction (24%) of the £12.1 billion surplus that currently sits on the PPF’s balance sheet.

The cost of paying full benefits for all schemes that may enter the PPF is a little more complex to estimate. Schemes in PPF deficit currently have liabilities of £61.7 billion and a deficit of £5.7 billion. The TP liabilities of these schemes are £71.1 billion, and the deficit is £15.1 billion. If we assume the same rate of admission to TPR as has been the case until now of 38%, the full benefits exposure is £5.7 billion (38% of £15.1 billion). We also need an estimate of the shortfall of the remaining 62% of schemes in deficit for which we have no data whatsoever. Half of the exposure is an arbitrary choice that results in additional exposure of £4.7 billion (50% of £15.1 billion minus £5.7 billion) for a total of £10.4 billion (£5.7 billion plus £4.7 billion). Applying the same insolvency rates of 0.3% and 0.4% as previously to the £10.4 billion, then the fair levy for the enhanced benefits would lie in the range £31.2 million to £41.6 million. Note that these fair levy rates are far below the £100 million and £200 million proposed for the coming years by PPF.

There would be a further cost to the PPF arising from their valuation of fund assets. Bought-in insurance policies are based on the full benefits payable to pensioners while the PPF pays only its reduced amounts. This means that their value as an asset to the PPF would currently be higher than would be the case if full benefits are paid by the PPF. For the overall universe, this difference was £15 billion in March 2023, a difference of 1.1%[4]. The ONS figure of £122 billion of insurance policies[5] suggests a slightly higher overall figure, £18.3 billion. For the assets held by the PPF, we can only use this as an approximation guide, as the PPF annual report’s asset allocation categorisation does not break out the value of policies accepted as assets by it. The decline in asset values (and surplus) would be some £318 million.

The general comments of the PPF submission contain a graph of the PPF 7800 index showing asset and liability values. This, and the calculations above based on PPF/TPR figures, need a most important caveat. The asset values used by the PPF in the 7800 index series are derived from TPR reports which have serious time lag problems. The PPF recognises that there are issues with its estimates of asset values, which would have been particularly acute in 2022.[6]  The ONS however conducts quarterly surveys of scheme assets. At December 2022, the ONS reported schemes overall held assets worth £1,230 billion sharply lower than the PPF’s £1,409 billion and TPR’s £1,376 billion.  These are differences of £179 billion and £146 billion respectively. The ONS is due to report the figures for March 2023 in late September. However, our own estimates suggest that this difference will have risen in that quarter to £198 billion (PPF) and £183 billion (TPR).

The effect of such a difference on funding ratios is substantial. At December 2022:

Clearly, the PPF estimate of scheme deficits would be substantially higher than the £5.7 billion published, but unfortunately, as we do not have data on the distribution of schemes, we cannot produce any meaningful estimate of the revision necessary. It should be noted that the differences evident should be expected to decline over the coming three years as triennial scheme valuations are received by TPR such that the asset values of TPR and PPF will tend to converge with the ONS numbers.

The nature of this problem is well illustrated by the position at the end of August 2023. The PPF reported schemes in (buy-out) deficit had a total deficit of £2.3 billion among 473 schemes (9% of total)[7], but at the same time a Professional Pensions survey reported that 36% of schemes reported being continuously in deficit and 14% as being either in deficit or surplus (TP basis) depending on the day and market changes.[8]

The submission’s general comments end with the assertion:

“Beyond our investment success, we have significant and externally recognised in-house experience of transferring DB schemes into the PPF with an efficiency not previously seen in the market, …”.

Rather a long time ago the PPF set itself targets of transferring 75% of schemes by value and 75% of schemes by number into the PPF within two years. We have heard no subsequent mention of how well they have done relative to these extremely low targets.

Given the repeated references to investment success, it would be informative to have the PPF publish cumulative figures for their main sources of funding to understand the magnitude and relative importance of these: transfers of assets in, investment income, levies collected and recoveries. It is only with this information would it be possible to make a proper assessment of their investment success.

The general comments end with:

“We have the capability and experience to assume a new consolidator role to support the government’s productive finance agenda and improve outcomes for members, and are enthusiastic about the opportunity to extend our remit in this way.”

We believe the PPF’s responses to the questions posed should be read in light of this.

Moving to the Questions and PPF’s responses:

Below, the questions from the consultation are in blue typeface, quotes from the PPF’s response are in italics with quotation marks and our responses are below in black typeface.

Question 1: do you agree with the assessment of the position? Is there evidence to the contrary?

“We agree there are international comparators that have greater allocations to productive finance than is typically true of UK DB schemes.”

The defining characteristic of these schemes is that they are open schemes. The asset allocation figure pasted in the PPF response shows that open schemes have some 35% of their assets allocated to equity. It is also notable that they have far less leverage than the PPF fund.

The general comments which prefaced these responses listed time as the primary consideration for productive asset investment:

“…productive finance assets require time horizons of 10 to 15 years…”

However, schemes entering a consolidator are overwhelmingly closed and have short residual lives; there is no magical transformation of maturity arising from consolidating many such schemes.

The response also states:

“DB schemes that are open to future accrual, for example, will be aiming to continue to invest for growth over time within a defined risk budget (to reduce the cost of the scheme to the sponsoring employer while limiting the extent of downside risks the sponsor is exposed to). This leads to asset allocations more in line with the government objectives set out in this call for evidence.”

These assertions are not supported by the data they show – schemes closed to new members but open to future accrual have a lower allocation to equity than either fully closed or open schemes.


Question 2: What changes might incentivise more trustees and sponsors of DB schemes to consider investing in productive assets while maintaining appropriate security of the benefits promised and meeting their other duties?

The PPF’s response can be summarised by:

“Increasing investment in productive assets therefore requires a fundamental change in the objectives of corporate DB schemes. We do not believe this can be achieved to any significant extent within the current framework.”

But this continues with:

From the corporate perspective, when de-risking and potentially a buy-out is within reach, there is no rational reason (for the vast majority of employers) to take on more risk – outside of their core business – putting their balance sheet at risk and negatively impacting shareholder appetite to invest in the company.” (Emphasis added)

While it is true that such investment would put the sponsor balance sheet at risk, it is also true that schemes and sponsors are expected to gain from such activity. Indeed, there are studies of the impact of de-risking and buy-out on share prices[9] and these show no impact from these activities. The PPF conclusion that:

“We therefore think it will be essential to change the framework and in particular to sever the link to the sponsoring employer covenant.”, lacks empirical support.

Question 4: What should be the conditions, including level of surplus that a scheme should have, before extended criteria for extracting surplus might apply?

“Maintaining a high level of security for members must be the overriding consideration.”

This is a trustee’s current fiduciary duty.

We have seen first-hand how quickly employer covenant can deteriorate, and there can be limited notice this is occurring.”

This is true only of a minority of sponsor employers. Basing regulation on the behaviour of a small number of schemes is a gross error, imposing unnecessary costs on the majority.

“It is equally important that schemes do not take risks the sponsor cannot support.”

This and the previous sentence are illustrations of the prevailing regulatory culture and mindset, as is further illustrated by the following sentence.

“With this in mind we would expect schemes to be funded on a prudent, low dependency basis, having reached their long-term objective and with a buffer before any extraction of surplus could be considered.”(Emphasis added)

A prudent, low dependency basis is the heart of TPR’s long-existing proposed new DB funding code (which incidentally bring with it costs of over £200 billion for schemes[10]). The proposal to add a further buffer to these is total overkill. Much more important though is the fact that the PPF fund as currently managed would not qualify as either prudent or low dependency under that code (if implemented).

It should be recognised that funding level requirements in excess of best estimate projections valuations constitute drains on the capacity of sponsor to invest productively in their business activities. The technical provisions prudent valuations required under PA 2004 typically lie in a range 10% – 20% above best estimate values. Self-sufficiency/low dependency valuations typically lie another 15% – 25% higher and buy-out around 5% above that level. The loss of productive investment capacity by sponsors from this is extremely large, ranging from around £180 billion in the case of technical provisions to close to £400 billion in the case of buy-out, should all schemes pursue that. It might be argued that the funding of schemes to these levels constitutes the largest diversion of capital away from productive assets, rather than the allocation of fund investment assets.

In addition, TPR reports an aggregate surplus in excess of TPs of £180 billion in March 2023. This alone would be material in terms of aggregate corporate finances, it is 7.6% of the ONS reported overall net capital of private sector non-financial companies (PNFC) for 2022, and far more for the 5,000 companies sponsoring those schemes. That PNFC capital earned a net rate of return on capital of 10% in 2022, above the investment rate of return reported by the PPF and most pension funds. Refund of surplus to the sponsor both enables productive investment by them and enhances their credit standing materially, to the benefit, as a risk reduction, of the PPF. Refund of surplus to the sponsor employer should be favoured by the PPF as, due to the capped nature of the s75 claim arising from a s179 deficit, it faces no increase in loss exposure while benefitting from an improvement in the strength of the sponsor covenant. Consolidators do not share this incentive.

Question 5: Would enabling trustees and employers to extract surplus at a point before wind-up encourage more risk to be taken in DB investment strategies and enable greater investment in UK assets, including productive finance assets? What would the risks be?

The submission states that PPF does not believe that it would, but states: “Any incentive would be limited by:” and offers two limitations which have not been proposed. These are:

“…the safeguards put in place e.g. a requirement to attain a prudent level of funding plus a buffer before any surplus would be extracted would mean the availability of any upside is limited” (Emphasis added)

The difference between prudent levels of valuation and best estimate are in fact a buffer. One of the great mistakes of TPR’s interpretation of pension legislation has been that they have not recognised that one of the prime reasons for prudence is the absorption of adverse short-term developments. As noted earlier, a further buffer is simply unreasonable.

“…the need to share upside with all stakeholders – all parties would need to be sufficiently incentivised to re-risk the scheme, meaning any upside would (as a minimum) need to be shared between employer and scheme members, limiting the extent of the benefits any one party could secure.”

This is not a response to the question posed. It is a statement of the PPF’s desired design. This is also true of the paragraph following the above paragraph. And finally, the response offers a caution:

Careful management would also be needed to avoid the potential risk of employers ‘gaming’ the system if preferential tax treatments are introduced. For example, an employer of an overfunded scheme could opt into the new regime, then extract some of their surplus at reduced tax rates before buying out their benefits with an insurer without having adjusted their asset allocation in any way.

(Emphasis added)

The idea that there should be an optional regime is bizarre. The potential tax loss negligible. On buy-out, the surplus is refundable to the sponsor employer, the problem being described reduces to a question of when surplus (to buy-out value in this case) may be retrieved, before or after buy-out.

Question 6: Would having greater PPF guarantees of benefits result in greater investment in productive finance? What would the risks be?

This short question induces one of the longest of responses from the PPF. The PPF is adamantly against increasing the level of compensation it pays. The response provides extensive objections.

However, there are important implementation issues and risks that would need to be considered and worked through. These vary according to the overall design. For example, providing full benefits for everyone would have significant funding and levy implications.”

As we showed earlier, increasing the compensation of existing members would have a cost of around £3 billion, and with the aggregate deficit of schemes now just £2.3 billion, the additional cost losses to the PPF could hardly be described as “significant”.

“If on the other hand, greater levels of PPF protection is a voluntary option for schemes, where they opt in to paying additional levy in exchange for a guarantee of full benefits, we would expect the number of schemes taking up the proposition to be low. Risks and issues to be considered in this scenario include:”

It seems that they intend to ensure that take-up of a voluntary arrangement such as that proposed by LCP would be low. There are five bulleted classes of objection, the first of which is:

“How to ensure the cost of claims can be met in all scenarios – the proposition depends on the PPF guaranteeing full benefits. That means the government would need to be clear as to how the cost of claims would be met including in tail scenarios. The PPF’s financial strength provides a high level of security to its current and future members but our legislation provides for benefits to be reduced and the levy to be increased to address a funding emergency. Neither option is likely to be available under this proposition. It would not be a guarantee if benefits could be reduced, and we expect the number of schemes taking up the option would be below what is necessary to provide adequate risk pooling. In other words, if we sought to fund for tail scenarios through a levy, the charge would be unaffordable. We therefore consider that it will be necessary to have access to capital from elsewhere in order to provide the necessary level of security. The government could choose to use the PPF’s existing funds for this. However, this would effectively mean schemes within the standard PPF structure were underwriting the risk posed by those who had opted into higher levels of protection. The government would need to consider carefully whether this is an acceptable use of PPF funds and an acceptable risk to place on existing levy payers. Clearly the extent of that risk will depend on a range of factors including the take up rates, the credit rating of participating employers and the funding and investment strategies of the schemes in question.”(Emphasis added)

It is not true that this would not constitute a guarantee if benefits would be reduced. Guarantees are well understood to be limited by the ability of the guarantor to perform. It is interesting that there is no quantitative support here for the assertion that the levy would be unaffordable – the total risk exposure of the PPF by their own figures is just £2.3 billion.[11]

Access to capital from elsewhere is also not strictly necessary. The PPF itself has the capital asset of future levy receipts from the schemes it covers.

The second bullet is:

“PPF levy charge – the scale of the PPF levy charge (in return for guaranteeing full benefits) could have an impact on the attractiveness of the proposition. The amount that needs to be charged will depend on the factors noted above. The extent to which levy funds are expected to meet claims risks (and what risk will be covered by other capital) is particularly key. As an illustration, however, if there were a reasonable pool of risk-based levy payers and the levy were set to meet the cost of claims in the majority of scenarios (minimising the likelihood of calls on other capital), then 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.”

It is clear that the PPF does not see any extra levy as being based on risk-pooling among members. The estimate of 60 basis points of scheme liabilities on top of the standard charge is simply economic madness – these costs are borne by companies – the textbook example of entities that invest in the real economy. In both Sweden and Germany schemes are charged 30 – 40 basis points of their liabilities for entirely unfunded schemes. The equivalent in the UK would be 30 – 40 basis points of aggregate scheme deficits, and those deficits are close to zero. See also the earlier commentary on Question 4.

The third bullet is:

“Moral hazard risks – it was recognised from the outset that the introduction of the PPF creates a moral hazard risk. Raising the level of protection provided to full benefits will increase this risk and ensuring this can be effectively mitigated will be key.”

“In the ITS v Hope judgment, it was decided that PPF protection wasn’t a relevant consideration for trustees to take into account when making some decisions. This principle was confirmed by the High Court in August this year in the Brass Trustees Ltd v Goldstone judgment. A change to the law would, therefore, be required for trustees to have regard to PPF protection when setting their investment strategy.”(Emphasis added)

As the opening assertion, that there is moral hazard risk in the PPF is false, we shall cover this issue fully. This refuting of this assertion also applies to the payment of full benefits and not only to the optional circumstance of doing so.

Moral hazard and the PPF

The classic illustration of moral hazard, which is an insurance term, is that the insured once insured ceases to take action which may preclude or lower the likelihood of the insured event occurring. Once my garden shed is insured, I no longer care if it burns down. Moral hazard is concerned with the action or inaction of the insured once insured. The standard mitigation is the deductible on an insurance policy – that is an amount of the loss incurred which will be borne by the insured, above which the insurance will pay out.

These are the actions/inactions of the insured. In the case of pensions, the insured in the scheme are the scheme members. Scheme members are not in a position to determine the actions/inactions of the scheme/fund; that is the role of the trustees of the scheme.

However, trustees are really not in a position to determine or even influence the likelihood of the event which triggers PPF ‘insurance’ – that is sponsor insolvency. Of course, trustees can influence the magnitude of loss once sponsor insolvency has occurred e.g., via the performance of the investment strategy of the fund, but this is not being done intentionally, it is bad luck or poor judgement.

The moral hazard argument is that full compensation from the PPF will encourage the trustees:

  • to take a higher risk/reward investment strategy, and
  • to use a higher discount rate for valuations


to reduce the cost to the employer of the scheme (and its contributions).

The problem with this argument is that the PPF is only on the hook, in summary, if:

  • the employer goes bust,
  • at that time the scheme is in deficit on a buy-out basis, and
  • the amount recovered under the Section 75 debt is not recovered in full.


So, there is no moral hazard as the shareholders in the employer have lost their equity investment. It is not a heads I win, tails you lose. Furthermore, the trustees have to act prudently when investing and when fixing the valuation assumptions. Contrast this with the cover provided under the Financial Services Compensation Scheme for buyout policies if the insurer goes bust and 100p in the pound cover is provided (subject to the FSCS having enough money). Note also our earlier comment on guarantees.

Extent to which the trustees can take account of PPF compensation to take a course of action intended to harm the PPF.

Both the Hope case[12] and the Brass case[13] are examples of cases where the trustees went to court to see if they could rely on PPF compensation as a justification for taking a course of action that they could not otherwise properly take. In both cases the court said they could not. Increasing the level of PPF compensation does not change the reasoning of either judgment.

Summary of the moral hazard points

The arguments raised by the PPF by reference to the two legal cases are supportive of the conclusion that trustees could not embark on a course of action (or inaction) to harm the PPF if the compensation level were fixed at 100%. To do so would be a breach of their fiduciary duty. If the justification for the reduced PPF payments was moral hazard in nature, as in the standard insurance problem, it is flawed. The insured, scheme members cannot exploit the insured position. If trustees were to indulge in such actions, they are in breach of their fiduciary duties and of course would be personally liable for any resultant losses.

The moral hazard argument has superficial attraction but on deeper analysis it does not hold water. Moral hazard is not a risk and never has been a risk for the PPF.

The fourth bullet is:

“Significant new legislation and associated processes would be required – including to support a new and separate levy charge and amend how PPF assessment periods and compensation work (reflecting the shift to protection of full benefits). In parallel we would need to establish new capabilities and systems and processes. If the take-up rate for the option is low, this will limit the extent to which expenses can be spread across schemes without making the option unaffordable.”

Legislation would be needed to enable full compensation but with regard to the other points here, the PPF really does protest too much. The criticism applies more to an optional arrangement such as the one proposed by LCP.

The final bullet is:

“Cost & time for schemes and employers – employers and trustees would need to consider carefully whether entering into this arrangement (with increased costs and risks) were appropriate for their scheme. This process would be likely to take some time (including to establish a revised investment strategy and agree how any investment upside would be shared between different stakeholders). We would envisage detailed covenant, actuarial, investment and legal advice would all be required before any final decision could be taken.”

These cautions are really only relevant in the optional case. If full compensation is paid to all schemes, there is little more required of schemes and sponsor employers than consideration of the relative merits of re-risking compared to any other investment strategy.

Question 8: In cases where an employer sponsors a DB scheme and contributes to a DC pension scheme, would it be appropriate for additional surplus generated by the DB scheme to be used to provide additional contributions over and above statutory minimum contributions for auto enrolment for DC members?

The response is correct in as far as it goes but fails to note that these are additional contributions. If early refund of surpluses is possible, the sponsor may utilise these to meet their basic AE requirements and claim both the tax and NIC deductions.

Question 10: What impact would higher levels of consolidation in the DB market have on scheme’s asset allocations? What forms of consolidation should the government consider?

The response opens with a sales pitch for the PPF as consolidator.

“Greater consolidation can create the scale necessary to allow the consolidated DB liabilities to be run off in a way which would facilitate investment of the assets backing those liabilities in both gilts and UK productive finance. We base this on the way in which we manage our own investments.”

This fails to recognise such a fundamental difference between the existing PPF fund and a consolidation fund that it should disqualify the PPF as a consolidator. The existing fund and its asset allocation strategy are supported by the capital value and liquidity inflows of future levies, by contrast there is no such support for a consolidator. The consolidator has need of own fund capital resources in the same manner as insurers.

“The government could design a public sector consolidator to meet its objectives; this could involve informing the investment risk budget, and setting parameters for the target asset allocation. A public sector consolidator could also pick up schemes which have not proved attractive to the private market.”

It seems to us that the risk budget and target asset allocations would rightly lie within the purview of the Board of the consolidator, not government. The open question is how this would be capitalised.

Question 11: To what extent are existing private sector buy-out/consolidator markets providing sufficient access to schemes that are below scale but fully funded?

This is one of the few responses with which we agree – small schemes do face real difficulties with buy-out in the current situation, contrary to the recent assertions made PIC and the ABI to Work and Pensions Committee.[14] It is also not the view of LGIM who were recently quoted in Professional Pensions[15]:

“The challenge is despite all the innovation and sophistication of the insurance market, there’s just too many pension schemes to fit into a finite capacity across the insurance industry.”

We would add that one of the constraints rarely discussed is the availability of suitable matching assets to buy-out insurers.

Questions 12: What are the potential risks and benefits of establishing a public consolidator to operate alongside commercial consolidators?

The response is:

“The public consolidator would potentially be competing for the same assets – this could be addressed by limiting access to schemes of a particular size. Care would need to be taken to ensure the consolidator can still achieve adequate scale including to meet the government’s productive finance agenda.”

This is confused – consolidators would be competing for both the assets and liabilities of schemes. As to the assets available to be held by the consolidator’s fund and government objectives, these are orders of magnitude larger than the assets held by private sector DB pension schemes.

“However, given the overall scale of DB assets, it seems unlikely this would be a particular barrier. For example, if the consolidator were opened to all of the smallest 4,500 schemes, that would still only cover £200bn or 15% of the total DB assets.”

This is a suggestion that a public consolidator might be restricted only to small schemes, a theme which is repeated at the end of this response.

“We also believe there could be significant benefits to a public consolidator, including: increased capacity and choice in the marketplace; the government could more readily design a public consolidator to meet its objectives; the public consolidator would not have any profit motive or desire to maintain the status quo; and the public consolidator could pick up schemes which have not proved to be attractive to the private market due to scale.” (Emphasis added)

If a public consolidator does not operate for profit, the capital resources it needs would not be compensated. The only possible sources of such capital would be government, or misappropriation of the PPF’s surplus. This would raise significant competition issues for private sector consolidators. In principle, the existing PPF arrangement is not for profit but in its 18 years of existence it has made a profit of £12.1 billion, 60% on the £20.3 billion of liabilities. Monopolistic pricing has clearly played a role in this. If we are to compare the PPF’s role in providing capital to UK plc, we need to recognise that this surplus has arisen at the cost of UK scheme sponsors and that investments from the fund in productive assets are far smaller than this. The net position of the PPF is that it has deprived UK plc of investment capital.

Another way of looking at the suggestion of PPF is that private sector consolidators would be restricted to the largest 1000 schemes or so in the market. Given the concentration of DB assets in the largest 100 schemes, the number of transactions at the larger end of the market will be vanishingly small and the capacity to write new business curtailed very quickly. So, the market will remain sub-optimal from the point of view of consolidation.

Private sector consolidators can only be expected to enter the market and compete if a PPF consolidator is seen to be exhibiting monopolistic pricing levies and charging too much. If a public consolidator were limited to small schemes, private sector consolidators would withdraw entirely from this market segment if the PPF was seen to be pricing competitively.

Question 13: Would the inception of a public consolidator adversely affect the existing bulk purchase annuity market to the overall detriment of the pension provision landscape?

The response

“A public consolidator could be complementary if, for example, its target market were focussed on smaller and/or weak (underfunded with weak sponsor covenant) pension funds.”

This could indeed be complementary, but more detail is needed as to how underfunded schemes with weak sponsors would be accommodated. Absent that detail, it seems likely the presence of a public consolidator would be deleterious to the overall market. It is particularly difficult to see how an underfunded scheme with weak sponsor covenant could be accommodated without placing a further burden on that company and actually restricting the use of sponsor funds as productive investment by the sponsor employer, placing further strain on the sponsor.

Question 14: Could a public consolidator result in wider investment in ‘UK productive finance’ and benefit the UK economy?

The response offers:

“Our own experience shows it is possible to generate a significant return on investments over the long-term with an evolving funding framework and a well-diversified portfolio that invests in productive finance assets alongside traditional liquid asset classes.”

This statement fails to recognise the fundamental difference in structure between the PPF fund as currently designed and a consolidator. As noted earlier, the ongoing levy serves as capital and liquidity in support of the existing fund, which is not the case for a consolidator. The consolidator may acquire schemes over time, but as they are closed to new members and future accrual, they will be progressively shorter in average life. The consolidator would grow larger and shorter in residual life.

The suggestion that consolidation of the smallest 4,500 schemes could result in £60 billion of productive investment also seems like a gross exaggeration and is without any analysis to backup why this would be the case. Many of these schemes will ultimately buy-out and many more choose to run on and discharge pensions as originally promised. For smaller companies, the excess expense of buy-out tends to material in terms of their capitalisation.

The final paragraph of this response begins with:

“A particular advantage of a public consolidator is that the government controls the design and can therefore ensure its objectives are achieved. This could involve informing the investment risk budget and setting parameters for the target asset allocation.”

This would limit the role of the Board severely as well as constraining asset allocation strategy. Given the history of government sponsored investment (irrespective of the government of the day), such involvement would greatly diminish confidence in the consolidator.

This paragraph ends with:

“A public sector consolidator could widen the universe of schemes that can access consolidation by providing a home for small schemes that a commercial consolidator might consider unprofitable. Those small schemes are unlikely to invest in productive finance assets given the higher governance burden and complexity.”

It is true that small schemes are unlikely to invest in “productive finance assets” but there is no evidence that a public consolidator could operate more efficiently than a competitive private sector consolidator, unless subsidised in some manner.

Question 15: What are the options for underwriting the risk of a public consolidator?

The PPF response to this question is surprisingly long, and begins with:

“We would expect a public consolidator to be run on a prudent basis and if its starting funding level is appropriate, it invests for value and looks to grow steadily over time, it is unlikely to need additional support.”

This really is meaningless in the absence of definition these terms.

The response suggests government underwriting of the consolidator as an option:

“Underwriting by the government would give complete reassurance to schemes considering consolidation – it would make the process of transferring to the consolidator significantly more straightforward (as trustees and scheme members would be reassured their benefits were fully protected in all scenarios) which would be particularly advantageous for small schemes. However, there is no reason why this should make the transfer process more “straightforward”.

The idea that

“In return for underwriting risks, the government would be able to inform the investment strategy (e.g. setting the risk budget for the fund) in order to support government objectives.”

is a recipe for disaster.

This would also reduce the confidence of many schemes in the consolidator vis-à-vis its ability to discharge its liabilities.

As an alternative the response offers:

“However, the government may also want to consider other options including underwriting by the PPF. This could be either in our current role as a compensator (e.g. if the consolidator’s funding strategy failed a claim could be made on the PPF) or by making some use of PPF reserves.”

The PPF currently admits qualifying schemes whose sponsor has failed. Failure of a fund is a very different proposition; is this exhaustion of all its resources or merely the consolidator reporting a valuation deficit. What would the equivalent of the Section 75 Debt be? Ultimately, this would require a different pricing methodology from that applied currently.

The response does offer some cursory cautions as to the response of levy payers and scheme members over the use of PPF surplus and continues:

“The use of reserves to provide capital backing could potentially be structured as a loan or investment which over time would be intended to improve the PPF’s funding position.”

This is the minimum necessary – if structured as a loan it would have to be subordinated. There is also a question as to the rate of return it should offer. The question of profit extraction which has plagued and delayed private sector provision would arise here.

The response offers:

“In addition, a consolidator providing a secure solution to schemes which may otherwise claim on the PPF would help reduce PPF risks, so supporting better outcomes for members and levy payers.”

However, this statement fails to observe that this is true also of insurance buy-out and any other consolidator. We would note that one of the sources of error in the liability estimates of the PPF 7800 Index is the failure to capture buy-out transactions in a timely way.

“Clearly if a capital buffer were required, the available funds would limit the potential size of a consolidator. In a purely hypothetical scenario where a public consolidator took on the c.4,500 smallest pension funds, we estimate that, once the consolidator reached scale, the ongoing capital reserve that would be needed could be of the order of 10-15% of total liabilities.”

A capital buffer is clearly needed by a public consolidator just as it is by private sector consolidators. This statement in and of itself makes a nonsense of the earlier claim that £60 billion of productive investment could result – the PPF only has reserves of £12 billion, and with that representing 10% – 15% of liabilities, it would limit the total liabilities consolidated to £80 – £100 billion and with that, productive assets acquired to £24 – £36 billion.

The final paragraph considers schemes in deficit:

“In relation to risk underwriting, a key question is whether a public consolidator would accept schemes with a deficit. Doing so could help provide an end-game solution for stressed schemes with the possibility of improving outcomes for members. However, it would present an additional risk. We would anticipate that sponsors would be required to pay off any deficit (at the point of transfer) over time. The government would need to consider carefully what would happen in the event of default. One option would be to reduce benefits payable, ensuring equal outcomes with members of schemes outside of the consolidator, and minimising funding risks.”

In response to Question 2 earlier, the PPF stated:

“We therefore think it will be essential to change the framework and in particular to sever the link to the sponsoring employer covenant.”

Accepting schemes in deficit would fail to sever the link to the sponsoring employer.  As proposed here, it would simply crystalise a deficit that would need to be reported on the sponsor balance sheet. Having schemes subject to transformation from full benefits to PPF benefits in the event of default by the sponsor would greatly diminish the credibility of any such transfers to the consolidator. It would almost surely lead to lawsuits. For example, trustees could not justify any transfer as this would incur costs and the members would be no better off in the event of employer failure. This topic is covered further in the PPF response to question 20.

Question 16: To what extent can we learn from international experience of consolidation and how risk is underwritten?

We need read no further than the opening sentence:

“Each country’s pension system is different, and the approaches taken by different countries cannot be lifted and dropped into the UK system.”

The balance of the response seems to be intended to reinforce by association the PPF’s claim to be a public consolidator.

Questions 17 and 18: What are the potential risks and benefits of the PPF acting as a consolidator for some schemes? Would the Board of the PPF be an appropriate choice to operate a public consolidator?

The response to these questions is simply a pitch for the PPF to be a public consolidator. In terms of the many claims made with it, few bear close scrutiny. There is no recognition that running a fund supported by ongoing levies is radically different from running a closed fund with no additional income.

The response asserts:

“Beyond our investment success, we have significant experience of preparing schemes for transfer to the PPF (or an insurer) and have successfully driven down the time it takes to do so.”

However, this is still measured in years. It would be interesting to know which schemes the PPF has prepared for entry into insurers. It is also worth emphasising that transfer to the PPF is transfer into a standardised set of pension benefits, not those promised by the scheme, which is a very different proposition.

Question 19: 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?

The response includes:

A public sector consolidator could be designed to focus on schemes which have not proved to be attractive to the private market due to scale, or to the unintended consequences of their earlier attempts to de-risk by buying annuities for part of their membership.”

From this statement and the submission, we have no estimates of the numbers and magnitudes of such, we presume small scale schemes, or indeed the precise nature or extent of the unintended consequences of buying annuities. We would observe that the total holding of insurance policies by DB schemes was £122 billion at December 2022. The response is therefore ambiguous, there are a small number of very large schemes which are too big to any individual bulk annuity transactions with an insurer to which it might apply.

Question 20: What options might be considered for the structure and entry requirements of a PPF-run public consolidator?

The response begins with:

“While design elements would need to be worked through in more detail, we would envisage a PPF-run public consolidator operating with prudent technical provisions and running standardised benefit structures (but with an actuarial value equal to full scheme benefits).” (Emphasis added)

and later in the first paragraph:

“Design choices would be needed around any eligibility restrictions, risk underwriting (see above), standardised benefit structures (likely to require a statutory process for establishing that the benefits offered are of equal actuarial value) and indexation.(Emphasis added)

This is transformation of the liabilities of these schemes, not their consolidation.

Trustees’ consideration of this would need to be aware of the very considerable risk of litigation from members. Actuarial equivalence has been claimed for many schemes but failed when tested in court. This would be a major competitive disadvantage relative to private sector consolidators offering continuation of existing benefits.  We would also note that the PPF has lost a number of cases concerned with the levels of its standardised benefits. We are at a loss to explain why indexation should appear here; is it not part of benefit structure?

The final sentence of the last paragraph contains an oddity which needs explanation:

“This would then offer a secure end-game solution for schemes that can’t access other market solutions, increased and continued asset investment in productive finance (with a PPF-like investment strategy), and options around long-term use of returns generated.”  (Emphasis added)

What is meant here by: “options around long-term use of returns generated”?

  • are there options that could allow schemes in deficit to join the consolidator?

See earlier discussion in discussion of Question 15.

  • what principles should there be to govern the relationship between the consolidator and the Pension Protection Fund?

The PPF favours a solution

“not unlike the relationship between the PPF and FCF, whereby the Board is responsible for both.”

We believe that a public consolidator should be completely independent of the PPF if conflicts are to be avoided.

  • should entry be limited to schemes of particular size and / or should the overall size of the consolidator be capped?

The PPF response simply notes that both of these arrangements are viable.

  • how could the fund be structured and run to ensure wider investment in UK productive finance?

The PPF response is yet again a pitch for their current approach to fund management. This fails to recognise the fundamentally different nature of the risk-bearing capacity of the PPF compensation fund and compared to a consolidator.

  • how to support continued effective functioning of the gilt market

As the PPF utilises leveraged LDI, it is very unclear how it could support the effective functioning of the gilt market and any use of this in a consolidator fund would prove deeply problematic. It is also worth noting that leverage LDI does not pay pensions, it is a tool to flatter the balance sheet of the scheme/sponsor. If PPF were to become a consolidator, something we would strongly recommend against, were to do this, it would not achieve the policy goal of greater amounts of investment in productive investment. Instead, given the LDI crisis last year, any such use would potentially destabilise the gilt market and at the same time would not be putting productive investment into the real economy.

Final thoughts

In reading through the PPF’s submission to the DWP consultation, one fact we found surprising is the paucity of references to The Pensions Regulator, with just a single reference in the body of the text to TPR’s anti-avoidance/anti-abuse powers in the response to Question 9.

The unmentioned hurdle in all of this is Phase II assessment. It is worth remembering that each consolidator had to pass Phase I assessment to then appear on TPR’s website as ‘assessed’. Phase II assessment is TPR’s review of each individual deal, which would clearly conflict with TPR’s statutory obligation to protect the PPF.

That said, perhaps the greatest surprise is the remarkable degree to which the PPF’s submission of evidence to the DWP consultation differs from their earlier submission of evidence to the Work and Pensions Select Committee DB inquiry in late April 2023.[16] One example of this is their statement that

“…we are supportive of the work, led by DWP and the Pensions Regulator (TPR), to introduce a revised DB Funding Code.”, which entails “Reliance on sponsors should reduce as schemes reach maturity; once schemes have reached maturity, they should have minimal dependency on the employer, and be fully funded on a low dependency basis.” and is compounded by “We’d encourage schemes whose funding has improved to consider reducing their investment risk to give greater assurance to members.”[17]

These radically different positions from the same organisation, on the same subject, are simply not compatible. Given these submissions come only months apart we wonder what the true end game is.

[1] PPF 7800 Index

[2] Private correspondence with TPR

[3] (£20.3 billion x 115%) – £20.3 billion = £3.045 billion

[4] As previously PPF 7800 and private correspondence with TPR.

[5] ONS, Financial Survey of Pension Schemes, December 2022.

[6] Prior to the LDI crisis, the PPF recognition of limits to its methodology were only ever in the end notes of the disclosures, see: However, post the LDI crisis this disclaimer appears on the front page of its disclosures, see:



[9] C-Suite 2023

[10] Authors calculations based on GAD Modelling the Universe of Defined Benefit Pension Schemes: Assessing the proposed Fast Track regulatory approach January 2023








[17] TPR is mentioned four times in the PPF submission to the Work and Pensions Select Committee.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Small beer; Keating and Clacher take a sober look at the PPF

  1. byronmckeeby says:

    The authors point out that the PPF became “cash flow negative” during 2022/23 for the first time.

    But surely one reason for that is the very low investment income yield PPF has (always) earned on its assets.

    PPF started the year with £39 billions of assets (a value which had fallen by year-end to £33 billions) and yet generated only £674.9m of investment income during the year, a yield of 1.7%.

  2. con Keating says:

    Indeed, the yield was 1.7% and the surprising thing was that this was down from the £813 million from an opening £42.5 billion of assets, a yield of 1.9%

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