Reforms to the Pension Protection Fund could see its remit extended to bring in schemes of distressed companies, with Chancellor Jeremy Hunt looking to divert assets into UK businesses, according to media reports.
The Treasury’s recent proposals regarding the Pension Protection Fund (PPF) suggest that struggling defined benefit (DB) schemes may have the option to voluntarily join the PPF, potentially granting members full benefits while alleviating the financial burden on struggling sponsoring employers.
This proposed move aims to expand the PPF’s asset base, currently standing at approximately £39bn, and enable the Treasury to have a say in how these assets are invested, aligning with strategic objectives to bolster the UK economy. Notably, the PPF currently exercises independent decision-making powers over its asset allocation.
The proposed reforms for the Pension Protection Fund (PPF) have raised several questions which include determining the asset threshold for schemes to opt into the PPF and whether outstanding recovery plans would be required or written off. The fairness of rewarding underfunded companies compared to those that have diligently contributed over the years is also a concern. Moreover, there is a potential for moral hazard risks, with schemes adopting risky strategies if they view the “opt-in” PPF as a failsafe.
LCP investment partner David Wrigley says: “This is a fascinating development, and highlights that the mindset across the industry is changing from DB pension schemes being viewed as a problem, to being viewed as an asset. These proposals would represent seismic changes to the UK pensions landscape, with far-reaching implications. With scant details on how this would work in practice, there are many more questions than answers at this stage.
“We think that DB schemes now present an opportunity to generate substantial excess assets over the long-term, so the obvious question is “who should benefit?”.
“Under these plans, it seems the Treasury stands to benefit. Both in terms of directing investment of large pots of assets, and also presumably with half an eye on an eventual surplus emerging from the PPF.
“We have developed an alternative approach where the PPF remains a “backstop”, but providing 100 per cent cover. Under this model, the benefits of investing DB assets could be shared across DB members, sponsoring employers and the (largely DC) retirement savings of those companies’ current workforces.”
