The PPF’s response to the DWP’s consultation on defined benefit options

In this insight we report on how the Pension Protection Fund (PPF) have responded to the Department for Work and Pensions’ (DWP) consultation regarding defined benefit (DB) options.

On 19 April 2024, the PPF published:

• its response to the DWP’s consultation on options for DB schemes which covered the Government’s proposals for easing surplus refund rules, bringing in a 100% PPF underpin and the PPF operating a public consolidator vehicle aimed at schemes that are unattractive to commercial consolidators; and
• an accompanying revised proposition for the structure of the public consolidator which follows the initial design document that was published on 1 March 2024.

We already know that the PPF supports a public consolidator and that it believes that it is ‘well placed’ to operate such a model. Its consultation response expands on this (and also touches briefly on the easing surplus access and 100% PPF underpin proposals). Key points from the response and how the design document has been updated are set out below – our in-depth insight outlines the key design features.

Choice and capacity

The PPF notes that having another consolidation option will bring ‘valuable additional choice’ in what is likely to become an ever more constrained insurance market. With recent improved funding, more schemes can consider their ‘endgame’ and it is important that they have access to relevant solutions especially given strong funding may not last. Capacity/ demand issues at insurers means the focus is naturally on larger and/ or less complex schemes so other schemes, mainly at the smaller end (a large proportion given 75% of DB schemes have assets below £100m) can struggle to access commercial consolidators. Furthermore, schemes with poor funding have no consolidation options and need an ‘endgame’ solution.

The public consolidator model put forward by the PPF is designed to counter these issues by allowing for schemes with a deficit, restricting price differences between schemes of different sizes and allowing for complex schemes e.g., through a standardised benefit structure.

PPF positive track record

The PPF is ‘well placed’ to run a public consolidator – it is not-for-profit, has a focus on members, ‘award-winning investment and member service capabilities’, and the maturity to work on something new without impacting its current role.

Structure differences

The proposed framework is sufficiently different to allay concerns regarding unfair competition.

To avoid unfair advantage concerns, the PPF would support allowing relevant parts of the consolidator model to be made available to commercial providers as well (e.g., standardised benefits and the transfer process).

Discussions on design

The PPF has already considered its design proposals with the industry – overall, there has been ‘clear support’ caveated with a warning that the consolidator needs to be carefully structured. The PPF has updated its design proposals with this feedback in mind – in particular how benefit standardisation and onboarding might work. Further industry feedback is welcomed.

Entry requirements

It should be set up to accept a transfer from any scheme that meets its eligibility criteria – entry requirements are needed for protection even if this means that certain schemes with a deficit will not be able to transfer because they cannot meet the required deficit payment plan. The PPF believes that a public consolidator will be unaffordable for schemes with less than 80% funding on a buyout basis.

The PPF supports pricing terms based on scheme circumstances and financial conditions at the transfer date, rather than being based on technical provisions which could prove inadequate.

Market immaterial

The PPF notes that the potential £130bn of DB market share that a public consolidator might attract interest from is ‘immaterial’ compared to the overall £1.4trn asset value of DB schemes. It also means that there would not need to be limits on the size of the consolidator, albeit the Government may wish to introduce one to ‘reassure the market’.

Necessary scale and underwriting

The public consolidator needs to have sufficient scale to be able to materially contribute (c.£10bn) to the Government’s aim of increasing pensions investment in productive finance – operating at a scale of £130bn asset value would allow for this.

Underwriting is needed so that the public consolidator can meet requisite security levels commensurate with commercial consolidators. The PPF suggests the Government should provide this underwriting through a “finite, contingent liability…[to] draw on in prescribed circumstances”. This liability could be reduced when the consolidator’s investment returns build up sufficient reserves.

Government underwriting would allow the Government to have some say in investment strategy (balanced against the need for independence and sufficient flexibility) and use of reserve, the latter of which should be set out in legislation from the outset.

Benefit standardisation

The updated design document discusses in more detail how schemes could deal with scheme benefits that do not match the menu of standard benefits that the consolidator would provide including matching to the closest alternative and converting actuarially where this is not possible.

Onboarding

The various options for onboarding that were discussed in the March design document have been distilled into one proposal that covers the transfer process.

The PPF wants to see the transfer process set out in legislation – the bulk transfer without consent legislation could be used as the foundation. Alternatively, guidance could be produced applying the current requirement for transfer credits to be ‘broadly no less favourable’ to a public consolidator transfer.

Surplus extraction

The PPF has no comment on the Government’s proposals to introduce a statutory power to allow relevant schemes to return surplus. However, it does recognise the importance of protecting against ‘too much’ being refunded and suggests a suitable funding protection would be a requirement for full funding on a low dependency basis with a risk-based buffer based on scheme investment risk.

100% PPF underpin

The Government is exploring allowing employers to pay a higher PPF levy in return for the PPF providing 100% compensation levels should the employer suffer a qualifying insolvency event. The PPF agrees with the Government that any super levy would need to be kept separate to the current PPF levy funds. It notes several difficulties with the proposal including the expense of premiums which to be scaled back would require strict entry requirements and security limits and the need for schemes to join simultaneously at the start to allow for sufficient scale. These issues could well mean that the Government will not take this option forward at least for the time being.