LCP is arguing in favour of a new “opt-in” regime that would fully protect member benefits through the PPF in its response to the DWP’s consultation on options for DB schemes,
According to LCP, the government and pensions industry are concerned about the underproductive allocation of nearly £1.5 trillion in DB assets. LCP argues that it will take more than government encouragement to change this. It identifies two barriers: trustees’ reluctance to increase investment risk for long-term, productive assets, and sponsors’ hesitation to target higher returns due to potential surplus complications upon scheme wind-up.
LCP has proposed a two-part solution to address these barriers it identifies in the government’s consultation. It includes the introduction of an opt-in regime allowing sponsors of well-funded schemes to pay a PPF ‘superlevy’ for 100 per cent member benefit protection during insolvency and changes to surplus extraction rules when schemes reach funding targets.
LCP argues that with enhanced PPF protection, trustees may be more inclined to embrace greater investment risk, while sponsors could become more enthusiastic about targeting higher returns, benefiting both current DB members and the UK economy.
Additionally, LCP discusses the Tony Blair Institute’s proposal to consolidate up to 4,500 DB schemes into the PPF, highlighting the complexities involved, including individual assessments, unique benefit structures, and data cleansing. It cautions that focusing on smaller schemes may require substantial effort without a significant impact on overall productive investment, as the smallest 2000 DB schemes collectively hold less than £20 billion in assets, whereas a single large DB scheme can surpass this amount.
LCP partner Jonathan Camfield says: “There is widespread agreement that DB pension fund assets could be invested more productively. But trustees have little incentive to agree to any form of re-risking if this puts member benefits at greater risk. In our view, the ‘secret sauce’ that would unlock this barrier would be the creation of a new PPF regime allowing sponsors to opt into 100% protection of member benefits. Only with this security will trustees be more willing to take a fresh look at scheme investment strategy.”
“We are delighted the government is consulting on our proposals to achieve this and in our response, we are calling on the government to make the required regulatory changes that will in turn enable a step change in pension scheme productive finance that we believe has the potential to be worth £100bns to the UK economy.”.
“Other ideas for DB reform have been proposed, but all of these seem to involve a huge amount of time and effort moving the assets of smaller pension schemes into a central consolidator like the PPF. Yet most DB assets are not sitting in small pension schemes.
“If the government is serious about getting DB assets more productively invested now, it should start with the biggest and best-funded schemes, and should enable the assets to be more productively invested where they are, rather than be distracted by moving around the assets of the smallest schemes”.
