The Pensions Protection Fund (PPF) said that if UK pension schemes with assets totalling £130bn (€152bn) transferred their assets into a public consolidator run by the lifeboat fund, operating at that scale, could unlock £10bn to invest in UK growth assets.
There are £1.4trn assets in defined benefit (DB) schemes, 75% of which have assets under £100m. The PPF estimates that up to 2,300 schemes serving 960,000 members and with assets totalling £130bn could be interested in transfering to a public consolidator.
This, according to the PPF, constitutes 10% of the DB market by members and assets, meaning that insurers and commercial superfunds would continue to serve 90% of the UK DB market.
In its response to a consultation by the Department for Work and Pensions (DWP) on Options for DB Schemes which closes today, the PPF said that a public sector consolidator investing for growth over the medium to long term would increase levels of investment in UK growth assets and Gilts, “certainly compared to the likely investment strategy of small schemes on the path to insurance buy out”.
The PPF currently allocates around 35% of its current portfolio to Gilts and apprxomately 30% to productive assets. It said 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, the PPF’s chief executive officer, said: “International experience shows that pension consolidation can drive better member outcomes and support productive investment.”
She said that there is a big opportunity in the UK to consolidate the highly fragmented DB landscape and make more of the £1.4trn 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,” she added.
Design
Alongside the DWP consultation response, the PPF has also published a design document setting out what the independnet pensions consolidator could look like.
According to the document, the consolidator model could be:
- Established as a statutory fund under the management of the board of the PPF (as is the case for the PPF itself and the Fraud Compensation Fund). The public sector consolidator would be legally separate from the other funds operated by the board with no cross subsidy or pooling of funds permitted.
- Operating on a non-sectionalised basis to maximise efficiencies and economies of scale. It would aim to run on (rather than act as a bridge to buy out) enabling it to invest for growth over the medium to long term (within a set risk budget). This would enable the consolidator to invest in the full range of asset classes including UK productive finance.
- Required to accept transfers from all schemes that could meet its terms, ensuring it provides a solution for schemes unattractive to commercial providers. This would perhaps be comparable to the role of NEST – a public body operating in a competitive market, but with a clear duty to address the possibility of market failure. In NEST’s case, the fund is required to allow any employer, regardless of size, to join; and to provide a flat rate per member charge, regardless of pot size or earnings potential.
- Providing members of transferring schemes with the actuarial equivalent of their full scheme benefits but through a number of standardised benefit structures. This would support lower ongoing administration costs and be a key element in the public consolidator minimising the price penalty faced by small and subscale schemes.
- Required to provide at least an equivalent level of security as that expected of commercial consolidators – providing a secure solution for members. The PPF believes the government would be the most appropriate provider of risk underwriting for the public sector consolidator.
- Allowing entry from schemes with a deficit on the consolidator’s pricing basis – but would require employers to enter into a payment schedule to close the fixed deficit over time. If the employer becomes insolvent before completing scheduled payments then member benefits would be reduced to reflect this (floored at the equivalent of PPF compensation levels). This approach would enable the consolidator to offer a solution to schemes with deficits, which are least likely to be able to transact with a commercial provider, while protecting the funding position of the consolidator and the security of other members.
- Making available to trustees the option to appoint panel firms (operating standardised processes) to drive down the costs to schemes of preparing to transact with the public sector consolidator.
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