Is PRT too slow, and can the public sector do it better?
Transferring pension risks and assets to insurance companies isn’t quick. Every scheme has its own rules and arrangements for the benefits that members are entitled to. Those benefits must be assessed carefully to calculate how much capital will be required to pay their pensions.
Some estimates suggest it might take another 25 years to transfer all closed DB risks and assets to insurers. The main reason for PRT’s timetable is that the pension scheme administrators have considerable workloads and have to accommodate PRT data requests alongside other priorities, including the Government’s pensions dashboard and GMP equalisation.
Some people suggest that the Pension Protection Fund (“PPF”) can help to accelerate the consolidation of DB pension assets by acting as a public sector consolidator of DB schemes, taking on their assets and liabilities. This would mean the public sector doing something that the private sector is already doing well.
The PPF is also subject to the same administration constraints as the PRT industry. To assist the PPF in becoming a “public sector consolidator”, the Government has suggested it should offer standardized benefits to members of DB schemes it absorbs.
But standardising benefits would inevitably mean some members get smaller pensions than they were previously entitled to. That would be unfair – they have earned those benefits – and raise the prospect of legal challenge. This means this reform itself is likely to proceed extremely slowly.
If policymakers want to accelerate the consolidation of DB assets into pools that invest in the UK, the best way for them to do so is to support the PRT sector.
Arguments for running on and extracting surplus. Despite the challenges, some people still argue for “surplus extraction”.
Here are some of their claims, and the reality.
• CLAIM Extracting surplus would boost the economy because sponsors would invest the money in infrastructure.
• REALITY That wouldn’t happen. Sponsors largely won’t invest these funds in infrastructure – they return value to shareholders. Surplus money extracted from a DB scheme would go from serving members’ interests to serving shareholders.
• CLAIM The PRT sector can’t support all schemes, so they need an alternative.
• REALITY This isn’t true. New entrants are joining the PRT market and competition is increasing – trustees who want PRT
always have multiple options.
• CLAIM Small schemes are ignored by the PRT sector, so they should be encouraged to run on instead.
• REALITY Not true. PRT firms offer specialist products for smaller schemes. More than 700 small scheme transactions
have been completed in the past five years. Some estimates show that the average size of PRT deals is falling as small schemes buy more policies.
• CLAIM The PPF should be able to consolidate any closed DB scheme and pool their assets.
• REALITY The PPF has a vital role guaranteeing pensions when sponsors collapse. It should focus on its core role
instead of trying to replicate what the market is already doing.
The PRT sector is growing and will continue to grow, as more and more trustees chose buy-in and buyout
policies as the best option for their members. More of those policies will be bought by smaller DB schemes as the market offers them more andmore options. More companies will enter the PRT market, meaning more competition, better deals for trustees and more security for members.
Download the full report PIC The Benefits of Buyout by clicking below
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