Industry experts warn that a public-sector consolidator must not be a way “to nationalise DB by the back door”, as the government’s consultation on options for DB schemes approaches its deadline.
The consultation looks into ways to remove practical or behavioural barriers to returning surplus. It aims to balance trustee options with member benefit security, building on upcoming reforms to overhaul pensions and diversify investments, and this includes exploring surplus use in DB schemes and the potential for a public sector consolidator.
Experts welcome the consultation’s aim to benefit all stakeholders but stress the importance of sustainable surplus management and redefining trustee roles.
Experts also support the idea of a public-sector consolidator to help members, especially when their benefits are at risk or too expensive from commercial providers. They also support the Pension Protection Fund (PPF) running this consolidator, especially if it fills a gap in the market and adapts with new providers.
But some experts worry about how secure the consolidator will keep members’ benefits, fearing they might lose out if it fails. They’re also afraid the consolidator might indirectly make all DB pensions effectively state-backed, which could stifle the commercial market.
Sackers partner Janet Brown says: “The next question after ‘can we access the surplus?’ is…’should we?’ And, if so, ‘who is ‘we’?’ Trustees’ duties, set out in part in complex case law, will still have to be satisfied. But as schemes become increasingly mature, any proposal that will give trustees and sponsors more choice should be a welcome one, and managing surplus can be a key factor in any decision to run on.
“Where schemes are sectionalised, or the sponsor has several schemes, how to unlock the surplus for the benefit of members, the sponsor, and possibly other schemes in the sponsor’s group, may lead to creative discussions and proposals. These are far more interesting than just how long it would be to a potential buy-out. Whether these changes would achieve the Government’s ultimate goal of increasing investment in UK plc is, however, another question altogether.”
Hymans Robertson head of pension policy innovation Calum Cooper says: “The spirit and intent of this consultation – to make it easier to share surplus for the benefit not only of members, but of all DB stakeholders – is welcome. This is a once in a generation opportunity for DB schemes to make decisions that will have a material impact on both stakeholders and members. It will also have an impact on the direction of pensions in the UK for many years to come.
“The swift rise of scheme surpluses and proven alternative endgames have transformed defined benefit security, and more schemes will run on if they could share surplus more easily. However, it is important that schemes are encouraged and enabled to manage surpluses with long-term sustainability in mind. There must be mutual consent between trustees and sponsors to enable a carefully managed surplus to create value responsibly and sustainably for both parties.
“One obstacle to sharing surplus is the perceived role of trustees. Their focus on the security of accrued benefits has crowded out other considerations. Now benefits are more secure, trustees can take a holistic view. But to make a meaningful decision, trustees must be clear on their role. Given how much the DB landscape has changed, the industry need to reconsider exactly what the role of a scheme trustee is.
“It is also vitally important that the possibility of putting accrued benefits at risk and sharing surplus should have minimum conditions. We welcome, in principle, the innovative idea of a PPF underpin. We don’t consider the proposed 100 per cent PPF underpin design attractive or a priority to stimulate productive finance nor to enable run on. Third-party capital arrangements are already creating options for well-funded schemes, which can realistically consider running on without the need for such a PPF underpin.
“A public-sector consolidator could improve member outcomes where full benefits would otherwise be at risk and is not affordable from a commercial provider. We support the PPF operating a public-sector consolidator in principle, if it fills a gap in the commercial endgame market. Given the superfund market is now live but in its infancy, the public sector consolidator should explicitly consider how its role may evolve if new providers enter this market.
“A key unanswered question is what is the target level of security offered by a public-sector consolidator, including whether or not members benefits are at risk of being reduced if it fails. It can only complement a strong commercial market if there is clarity on the level of security offered and its remit is designed according to sound gateway principles, and if any easements to allow benefit standardisation are also available when transacting with commercial providers.
“A public-sector consolidator must not be a way to nationalise DB by the back door. That wouldn’t be in stakeholders’ best interests, as any indication that this could be the likely outcome would be expected to deter new commercial entrants or lead to commercial capital taking flight. In doing so it would exacerbate the very problem around commercial capacity that the Government believes a public-sector consolidator could help solve.”
Isio partner Stewart Hastie says: “Surpluses are currently difficult to access for many DB schemes, making it hard to put them to productive use. We support Government proposals to unlock their potential value. This includes providing additional benefits to members, refunding to sponsors to invest in their businesses or subsidising future benefit costs.
“Based on our experience of our Purposeful Run On (PRO) approach under the current regime, we believe the Government should introduce a flexible, permissive regime, which allows access to any surplus above a scheme’s low dependency liabilities. The Pensions Regulator can issue guidance to help trustees and sponsors agree surplus sharing that’s suitable to a scheme’s circumstances.”
“The type of PSC envisaged in the consultation is likely to be very attractive to trustees, sponsors and members allowing benefits to be quickly secured and moved off balance sheet. This means it is likely to fail the Government’s aim of ensuring that it doesn’t distort the existing commercial market, which already provides a variety of options for schemes wishing to consolidate: insurance companies, super-funds, DB master trusts. These commercial providers are unlikely to be able to compete with a PSC that could offer attractive benefit simplification options and would be effectively, State-backed.
“If a PSC is to be launched, it needs to focus on the areas of market failure. We believe this could be achieved by ensuring its remit is initially limited to two areas. Firstly, it could offer a Superfund style consolidation option for schemes in PPF assessment who are unlikely to be attractive to commercial consolidators. Secondly, it could effectively act as an insurance company of last resort for ongoing sponsors of smaller schemes, with pricing set at a margin above commercial insurance pricing.”