Some time ago, I had a meeting in 10 Downing Street, representing First Actuarial. The topic was the PPF and we had three proposals which I delivered
- That the PPF brought down the cost of the levy as it was grossly over-cautious.
- That the PPF invested more in growth and less in liability matching assets
- That the PPF started investing for the good of the country
If you don’t believe me, then tough, here is me stroking the cat on the way in (photo by a copper – it was Christmas)
At 10 Downing Street to ask for PPF to do more!
Well, a few years and a few prime ministers later, we have one – and a chancellor – and a pension minister who appear joined up and the PPF are using this opportunity to plea for liberty to do our three kind of things.
Talking with Mary McDougall of the FT, the PPF is forthright
The UK’s £32bn pensions lifeboat has said it will invest 10 per cent of its assets in British infrastructure and scale-up companies if the government expands its remit to allow it to hoover up smaller schemes.
The FT has a much more interesting story lurking behind the infrastructure promise
The Pension Protection Fund — which was set up 20 years ago to protect defined benefit scheme members of failed companies — wants to be allowed to consolidate the UK’s sprawling DB sector, but needs ministerial approval to expand.
This is something the PPF has been hinting at for some time but never quite so clearly
“We’ve committed that we think we can get 10 per cent of its assets into UK productive finance, which is the juicy stuff the government wants if we ran a public sector consolidator operating at scale,”
I guess that First Actuarial (and me) did not quite have the leverage that the PPF has today!
No one should doubt the need for a beneficial consolidator. Small pension schemes which are eyeing up the insurers have a very limited market – Just had 35% of the Bulk Purchase Annuity market and though they may be followed by other less intrepid insurers, right now they are the small DB schemes best escape from a task they no longer see themselves able to maintain themselves.
The previous Conservative government last year explored turning the fund into a consolidator in a consultation that estimated that rolling up all DB schemes with under 100 members would create a fund with about £10bn in assets.
For schemes with a weak covenant group — meaning the corporate sponsor’s ability to pay pensions appears vulnerable — this rose to 800 schemes with £80bn in total assets. The UK has about 5,000 private sector DB schemes serving 9mn members.
Those with fewer than 1,000 members make up 80 per cent of the total number of schemes.
“We are looking forward to expanding both domestically and internationally,”
Ostermann said, adding that the drive to consolidation would
“give better outcomes to members”.
This final comment begs questions. “Better outcomes” may refer to the outcomes if small schemes fall into the PPF because they are bust but this assumes an employer unable to meet the bill of setting things right and a consolidator prepared to make up the deficit.
If a closed scheme is sufficiently solvent, then it should not be a burden on its sponsor and should find consolidator to meet its needs, but the PPF is not saying that, it is saying that it will compete with insurers and potentially superfunds and it might well be that it will do what it has been discussing in events such as this year’s PLSA and take less attractive commercial propositions. It appears to be saying that it will take on schemes and pay benefits in line with what members were promised.
To do this , it will need to find growth in the fund and to find growth it is going to need to invest more in the kind of productive finance the Treasury and the Pension Minister, wants it to provide.
Here we have an approach hinted at by its chief actuary last month and I would support it. Much as Britain’s 5,000 DB plans provide jobs for actuaries, administrators, lawyers and investment consultants, this is not productive finance.
We could see DB pension scheme trustees having new friends in Croydon.
From the scheme sponsor’s point of view there is little difference between consolidation and buy-out. The cost of each is entirely determined by the timing of the transfer of liabilities.
If a pension scheme is in deficit at the time of consolidation, the PPF consolidation proposals would create an actual liability on the Company replacing the contingent liability currently reported on the Balance Sheet. The fact that the Balance Sheet figure is entirely contingent on changed assumptions is not lost on Companies – particularly those who previously reported pension scheme deficits and are now reporting surpluses, but equally those who are frustrated by the deficit fluctuating wildly when there has been no fundamental changes to the predicted cash liabilities of the pension scheme and the income generation capacity of the scheme’s investments has not changed.
From the employer’s point of view the capacity of the scheme to invest productively under its guarantee is paramount to the ultimate cost to the employer. Much of the problems that now arise particularly with small DB schemes (which should by now be larger DB schemes) is that the legislation, particularly that creating the PPF and the TPR, diverted trustees away from productive investment into a so called “low risk” investment strategy. The fallacy that strategy is lower risk was exploded by the LDI crisis.
It appears that the TPR is now suggesting that trustees following their previous advice have let their pension schemes and employers down by not investing in “growth” assets. It was the salesmen for the insurance industry and the PPF (itself a compulsory insurance product) represented by the TPR (at least under previous management) who over-emphasised “risk” measured purely against the insurance company pricing model. As a result employer/sponsors have had to pay twice: Once in terms of PPF premiums on an inflated risk measure and secondly to compensate for the lower returns from the “low risk” investment approach (still perpetuated in the DB Funding Code).
Macro-economic “growth” is more likely to be achieved by encouraging the 4,000 odd existing DB schemes to grow, both by investing for growth and also by directing new contributions into the DB scheme pool rather than the DC pots of individual members (dead money to the Company). In that way the future employment cost of the sponsoring company is reduced by the extra return from pension scheme assets prudently invested for long term growth. By reducing the future pension cost the sponsoring employer itself is more likely to be able to grow and this is likely to create more economic growth than an arbitrary percentage of existing and ever decreasing pool of pension scheme assets in which the employers have no interest.