Pensions - Articles - PPF run consolidator needed to bolster DB endgame options


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.

 The Pension Protection Fund (PPF) has, in its response to the Department for Work and Pensions’ (DWP) consultation on Options for Defined Benefit (DB) Schemes, said more choice is needed to enable all DB schemes to capitalise on improved scheme funding and get endgame ready. Evidence suggests a consolidator would offer a much-needed new option for schemes, and their sponsoring employers, who face challenges securing the best possible outcomes for their members.

 Interest rate rises in recent years have boosted overall DB funding levels, fuelling unprecedented demand for ‘endgame’ solutions.  The target ‘endgame’ solution for many schemes remains insurer buyout. Despite the welcome increase in the value of buyout deals and the advent of commercial superfunds, evidence shows many schemes don’t have timely access to commercial solutions on reasonable terms. Other, less well funded schemes, remain locked out of the market altogether. Given the sensitivity of scheme funding to changes in interest rates, there is uncertainty over how long recent improvements in aggregate funding levels may last.

 The DB market remains highly fragmented with a long tail of smaller schemes – 75 per cent of schemes have assets under £100m - which can face per member running costs several times higher than larger schemes. Existing consolidation options are mostly focused on larger schemes. The PPF assesses that up to 2,300 schemes, serving 960k members, and with total assets of £130bn, could benefit from the additional choice the new consolidator would provide. Even at this upper limit of potential eligibility, this constitutes at most 10 per cent of the DB market by members and assets – insurers and commercial superfunds would continue to serve the bulk (90 per cent) of the DB market.

 Kate Jones, Chair of the PPF, said: “The PPF’s core mission is to protect DB members and, 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.”

 The new consolidator could, dependent on scale, also help maintain a strong UK gilt market and increase investment in assets which support UK businesses and the economy. The PPF’s existing investment approach and asset allocation shows what could be achieved. The PPF currently allocates c.35 per cent of its current portfolio to gilts and c.30 per cent to productive assets. The PPF assesses that the new, separate, consolidator could, dependent on scale, risk budget and suitable underwriting, potentially allocate around £10bn to UK-growth supporting investments.

 Michelle Ostermann, PPF CEO, said: “International experience shows that pension consolidation can drive better member outcomes and support productive investment. There is a big opportunity in the UK to consolidate the highly fragmented DB landscape and make more of the £1.4 trillion in assets work harder for members and the UK economy. To fully realise the potential of the new consolidator, we believe it should be open to all schemes who, without it, may struggle to get timely access to market solutions. We remain confident that a well-designed PPF-run consolidator will complement commercial providers and ultimately support a thriving marketplace which delivers for all members.”

 Alongside its consultation response, the PPF has published a revised proposition, informed by stakeholder feedback, for how the consolidator could be designed and operated.

 Additionally, on the proposal to enable well-funded schemes to extract surpluses, the PPF welcomes the consideration of suitable safeguards to protect the security of members’ benefits.
  

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