The case for the PPF as a DB consolidator is far from proven

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.

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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

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.

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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

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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

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.