In response to the DWP’s consultation on ‘Options for Defined Benefit schemes’, which closes on 19th April, consultants LCP have argued that the Pension Protection Fund (PPF) could have a key role to play in the ‘endgame’ for DB pension schemes. But any new regime would need to play to PPF’s strengths, ensuring that it met needs not currently well served by the market.
With regard to larger and stronger schemes, the LCP response emphasises the advantages of the PPF being able to provide 100 per cent cover for member benefits, funded via a new appropriately priced ‘super-levy’ which sponsors could opt to pay.
This would give trustees confidence that member benefits were fully protected and could enable such schemes to run on, invest in a wider range of productive assets, and produce surpluses to the benefit of DB members and sponsors, as well as potentially the DC generation and the wider economy.
At the other end of the scale, LCP argue that the PPF could have a market stabilising role to play in improving outcomes for members of smaller schemes. A public sector consolidator, focused on smaller schemes, could help to reduce governance costs and improve investment strategies, increasing the chances of pensions being paid in full.
LCP suggest that the consolidator could focus on schemes with liability values that are under say £10m, but being able to take on larger schemes subject to a ‘gateway test’ designed to mitigate the risk of unfair competition with superfunds or insurance buyout.
These are exciting times in the DB landscape, and the Pension Protection Fund could have a crucial part to play in making the most of current opportunities. For large well-funded schemes, the option of full 100% PPF protection could give trustees comfort and encourage such schemes to run on and invest in a wider range of productive assets, generating surpluses to benefit members and sponsors.
For the smallest schemes, a public sector consolidator could improve outcomes, but its place in the market will need to be carefully judged to reduce the risk of unfair competition with other options already available to schemes.
The Government must be bold in reforming the rules around DB surpluses, alongside improved member protection, to make sure that pensioners, UK business and the wider economy can make the most of the assets which have been built up over decades of careful stewardship of DB funds.