XPS Pensions Group has expressed concerns about Government’s plans to use the Pension Protection Fund (PPF) to act as a public consolidator for DB schemes.
The pensions consultancy said it found proposals to use this lifeboat schemes as a consolidator for schemes when corporate sponsors were not in financial difficulty as “troubling”.
It said this would effectively mean that UK taxpayers are effectively underwriting the risk of these schemes and pointed out this raised issues of fairness, particularly with many taxpayers now saving for retirement through DC schemes which typically offer less generous benefits.
In its response to the government’s consultation on this issue it said there was a lack of evidence for a need for a public consolidator. It said the consultancy itself had not encountered the barriers that the PPF has identified in some schemes getting quotes from existing consolidators, or exploring alternative endgame strategies.
It added that there were likely to be significant complexities around benefit harmonisation when it came to using the PPF as a consolidator. It said this could create scenarios where the benefits are expensive to provide, or which open up the possibility of legal challenge from those whose benefits are down-rated.
As well as being expensive for taxpayers and raising issues of unfairness, XPS Group said these proposals could create competition-distorting effects. It said a consolidator which is underwritten by the taxpayer is likely to be more attractive to schemes than commercial competitors, thus distorting the existing market for such services.
However XPS said it would like to see an extended role for the PPF to support viable DB schemes of insolvent sponsors to reach buyout and improve outcomes for pensioners of failed businesses.
This would see the PPF providing stewardship to insolvent sponsor’s schemes that are well-funded but cannot afford buyout.
XPS said the PPF’s role could then be to safely manage the schemes to buyout over the medium term. It said this would lead to demonstrably better outcomes for members than the status quo of those schemes either entering the PPF with reductions to members’ benefits or securing a “PPF plus” buyout with an insurer resulting in cuts to members’ benefits.
XPS Pensions Group CEO Paul Cuff says: “The PPF has done a fantastic job protecting people for 20 years and has saved many thousands of pension scheme members from disastrous outcomes. Big improvements in pension scheme funding levels mean it has less to do these days, however an update in its mandate could see it continue to play a valuable enhanced role protecting members in the event of corporate insolvencies by stewarding viably funded schemes on the last leg of their journey to buyout.”
Cuff adds: “The idea that the PPF should have a wider role in consolidating schemes even where the corporate sponsor is able to continue to provide support is a troubling one. We find the suggestion that UK taxpayers should underwrite the risk in a PPF-run consolidator to be quite extraordinary.
“On any critical assessment, there is no market or public need for a state consolidator. Given that, why should taxpayers underwrite the most generous pension schemes in the country that these days only a lucky few are members of, against the backdrop of one of the biggest issues we face as a society, which is that the vast majority of taxpayers are members of defined contribution schemes where the contributions paid in are far too low for most people to get anything like the same level of pension as those the PPF will be asking them to guarantee?”