For context, overall DB funding levels have received a significant boost in recent years, thanks to interest rate rises. While well-funded DB schemes are expecting an endgame solution of an insurer buyout at reasonable terms, many less-well-funded schemes still appear to be effectively locked out of the market, even though many sponsors are keen to move their schemes on as soon as possible.
Given recent improvements in funding levels may not last if interest rates reduce from current levels, the PPF believes that around 2,300 schemes with total assets of £130bn, serving 960,000 members, may struggle to achieve an appropriate endgame solution in the short term, making it difficult for schemes to secure the best possible outcomes for their members.
A PPF-run consolidator would offer a new alternative for schemes that are deemed unattractive to commercial providers, particularly for smaller schemes, creating a new and secure home for transferring members. The PPF’s response to the consultation noted, ‘The disproportionately high running costs of small schemes can be a real drain, in terms of money and time, on sponsoring employers. Critically, schemes continue to face funding risks – there is no certainty that all schemes will retain today’s strong funding levels several years into the future. This may be a particular concern for schemes with weaker employer covenants.’
The PPF-run consolidator scheme
The DWP proposal is to establish, by 2026, a consolidator scheme that could be used in buyout situations by schemes considered unattractive to commercial consolidation providers. The DWP is seeking views on several factors, including consolidator eligibility, structure, member benefits, governance, funding, underwriting, and how scheme deficits and surpluses would be treated.
The objective is to use surpluses to invest in ‘productive asset allocations’ and the PPF anticipates a new consolidated fund could potentially unlock £10bn for UK productive investments. From the PPF’s perspective, productive investments are those that help to support businesses and the wider UK economy. These can include both public and private equity, as well as real assets including property, infrastructure, timber and farmland.
The DWP proposals also foresee a scenario where employers can pay an additional levy to the PPF out of surplus funds to ensure that members’ benefits are 100% guaranteed in the event of employer insolvency. This would override current legislation and some existing DB pension scheme rules, as some schemes contain provisions preventing surplus funds from being returned to their scheme employers.
Delivering the best possible outcomes
If given the go-ahead, the PPF is confident it will be able to offer strong administration, delivery, and investment services as a DB consolidator. Kate Jones, Chair of the PPF, said, “As we look to the future, member interests must remain paramount. To deliver the best possible outcomes for all DB members, choice, and timely, affordable access to endgame solutions is vital. Evidence and stakeholder feedback suggests more choice in the market is needed to capitalise on this window of opportunity with improved funding levels. Our maturity and capabilities mean we can operate this new, separate fund – providing more choice for schemes and a secure home for transferring members – without affecting the continued successful delivery of our existing functions.”
According to Paul Maynard MP, Minister for Pensions, “We will ensure that employers and savers alike can take advantage of strong investment returns, supported by the revised scheme funding regime, which makes the headroom for more productive investment explicit whilst keeping members’ benefits safe.”