The PPF is in confident mood in its response to the DWP’s Options for DB schemes consultation.
-
More choice and capacity is needed in the Defined Benefit (DB) pension market to capitalise on improved scheme funding – evidence shows market challenges.
-
Potentially up to 2,300 schemes with total assets of £130bn serving 960k members may struggle to obtain timely access to an appropriate endgame solution.
-
PPF-run consolidator would offer a new option for schemes ‘unattractive’ to commercial providers and a secure home for transferring members.
-
New Fund could potentially unlock c.£10bn for UK productive investments.
WTW’s David Robbins does not quite get the message.
Paraphrasing the PPF’s new documents on its proposed role as consolidator:
– “£130,000,000,000 is an immaterial sum”
– “And, don’t worry, we won’t get that big anyway.”
– “Because we will get that big, we’ll be able to invest lots of £ how the Government wants us to.”
– “If the… pic.twitter.com/OgruJhhcEP— David Robbins (@David_J_Robbins) April 19, 2024
His confusion is supported by some mysterious and seemingly contradictory statements.
The greater space of my blog – allows David’s points to be illustrated using his marked up excerpts from the PPF’s response to the DWP’s DB consultation.
The PPF sees a need for considerable intervention to make this happen.
Not only would the PPF need to be repurposed but it considers it would need a leg-up to ensure it did not suffer the possibility of failure. The PPF has had the leg-up of levies since its formation and now finds itself in the happy position of having a £12bn surplus
Advantages in design and advantages in underwriting, could lead to a 100% probability of success. However, this would be at the expense of the private sector – who are showing considerable interest in helping the PPF’s target market to market on.
The target of £10bn of productive finance seems modest and suggests that the PPF considers it will be offering little more than a gilts fund with allocation to such assets at little more than 6%. If this is the extent of its aspiration, you have to wonder why the Government needs a PPF at all – it bought in £25bn of assets from Royal Mail at the wave of the Chancellor’s wand.
The risk of not achieving scale is something commercial providers have to provide capital against. The PPF appears to consider it can be underwritten to not just de-risk their efforts but to jeopardise the capital buffers of commercial providers.
Surely there are easier ways to get productive finance into DB pension plans?
The language is indicative of the PPF’s attitude. Clearly it sees the £1.4 trillion of DB assets in an extended auction where price and security are the principal levers for purchasers to outbid each other. Some would its vision, an attempt to rig the auction with tax-payer’s money.
You can read the response for yourself here.
If the PPF is offered a pricing advantage and can imply a crown guarantee, the PPF could be as dominant in the small DB market as Nest is with small employers offering workplace pensions.
David is sceptical and finds solace in not being alone
3) This is a refreshingly restrained level of enthusiasm for a public sector consolidator. pic.twitter.com/fQERGk986M
— David Robbins (@David_J_Robbins) March 26, 2024
The comparison with Nest is instructive. Nest addressed a capacity crunch where there was no appetite from workplace pensions to take on straggling employers on acceptable terms. Through the final years of auto-enrolment, commercial providers competed with Nest in a market that saw hundreds of thousands of employers staging in each of the final three years of staging. Over a million employers now use Nest.
By comparison, there are only 5000 corporate employers sponsoring DB plans. Each plan has a legacy of paying pensions , each sponsor a history of sponsorship including recent deficit contributions paid at great cost to corporate strategy. Even the smallest of these DB plans manages millions of pounds worth of assets and liabilities.
Many of these schemes will consider their independence a matter of pride, some with find co-sponsors through capital backed arrangements and some will consolidate into commercial superfunds.
There is a currently a strong market, even for small DB plans – for the right to work with trustees to help schemes carry on. The need for state intervention through the PPF is not clear. Unless the view of Government is that it does not want commercial providers supporting DB schemes in run on, the need for the PPF to compete is not proven.
The PPF was set up to meet an immediate need when there was no competition. It has performed well and is now a well run organisation, albeit rather over-fed.
One small point, there may only be 5000 schemes but they have some 12700 sponsor employers according to the Purple Book
The DWP consulted on two matters concerning DB schemes: Surplus distribution to encourage “productive” investment by pension schemes running on; and a public sector consolidator using PPF resources.
These represent conflicting goals in that you cannot distribute surplus to employers or members if you have consolidated and you cannot then aspire or invest to have a surplus to distribute even as a long term goal.
The DWP suggests the PPF public sector consolidator would be targeted at closed smaller schemes in deficit but, as the ever increasing surplus in the PPF itself has demonstrated, in a mature closed pooled risk scheme scheme experience will always trump valuation liability run down. This is likely to be of increasing significance the smaller the scheme.
In the target schemes, after nearly 20 years of deficit recovery plans, if they are still in deficit it is surely a sign that company cash flow has been an issue. Such companies are therefore unlikely to be in a position to provide additional funds to “buy-out” the pension schemes liabilities with any consolidator. They have also managed to survive for 20 years with a volatile pension scheme liability on their Balance Sheet, even when that may have indicated “technical insolvency” (total liabilities exceeding total assets). The pension scheme deficit is in essence, and widely regarded as such, as a contingent liability only converting to an actual liability on a PPF triggering event or scheme wind-up.
The DWP suggestion that the consolidator could become an unsecured creditor for the deficit against the pension scheme assets is very unlikely to be attractive to such companies as it will convert the contingent liability into an actual liability. This is likely to impair the employer’s credit rating.
From the members point of view, having their pension right transferred to a consolidator is unlikely to provide any benefit as until the employer’s debt to the public sector consolidator is repaid in full they remain subject to the same PPF protections as they have at present. They have also lost the, albeit distant, possibility of benefit enhancement once the scheme experience has turned a deficit into a surplus.
The target companies have already two cash outflows relating to pension provisions, the deficit payments in relation to the past service of a previous generation of employees plus the payments required under auto-enrolment into current employees’ DC arrangements. It would appear to me to be a sensible course of action by such companies to combine those two cash outflows plus the current employees’ own contributions into one by re-opening the pension scheme to defined benefit accrual. In this way the past service deficit would be eliminated more quickly as the pension scheme is no longer having to sell income earning assets to pay the current pensions and the scheme experience surplus of the previous generation of employees would become available to support the future benefits of the current employees. While there may be concerns over the level of defined benefit that could be provided to the current employees against the alternative DC arrangements, the inherently lower cost of an open DB scheme invested productively will always provide a better outcome, even outweighing the the reduction to 90% if PPF benefit levels remain as at present.
Finally, I believe employers wish their contributions to be used to provide a “wage in retirement” rather than to create inheritable wealth for those that can forego their pension. Members for whom that goal dominates can always transfer out of the DB scheme leaving additional cover for the other members.