New PPF proposals would represent ‘seismic changes to the UK pensions landscape’ – LCP
26 May 2023
Reports this morning of new proposals from the Treasury to reform the PPF raise a number of questions. The Treasury is suggesting that “struggling” DB schemes could choose to opt-in to the PPF, which would (presumably) provide full benefits to members of those schemes and potentially “release” sponsoring employers that were otherwise struggling to support those schemes.
The apparent intention is to grow the size of the PPF asset base (from the current c£39bn) and allow Treasury to have some influence over how those assets are invested – to support strategic objectives to grow the UK economy. Currently, the PPF makes its own decisions on how to invest its assets.
LCP welcome questions being asked about whether the DB pension system could be reformed for better outcomes and agree that the PPF is a successful model that can be built upon to deliver better outcomes. There has been a lot of focus on getting DC assets to work harder for the UK, and we’re glad the focus is shifting to the (much larger) pool of DB assets.
Some important questions about these plans include:
- What level of assets would be required to “opt in” to the PPF? Would outstanding recovery plans be due prior to entry, or would sponsoring employers have those “written off”?
- Does this proposal reward companies that haven’t well-funded their schemes? Is that fair to companies that have contributed more over recent decades?
- Would this create significant “moral hazard” risks of schemes adopting very risky strategies, viewing the “opt in” PPF as a failsafe?
LCP have been developing an alternative approach to building on the PPF, which instead would focus on well-funded schemes with their members’ “lifeboat” PPF cover increased to 100%, and then carry on investing more for growth for the benefit of their own members, their sponsoring employers and the current workforce.
David Wrigley, Investment Partner at LCP, commented:
“This is a fascinating development and highlights that the mindset across the industry is changing from DB pension schemes being viewed as a problem to being viewed as an asset. These proposals would represent seismic changes to the UK pensions landscape, with far-reaching implications. With scant details on how this would work in practice, there are many more questions than answers at this stage.
“We think that DB schemes now present an opportunity to generate substantial excess assets over the long-term, so the obvious question is “who should benefit?”.
“Under these plans, it seems the Treasury stands to benefit. Both in terms of directing the investment of large pots of assets and, presumably, with half an eye on an eventual surplus emerging from the PPF.
“We have developed an alternative approach where the PPF remains a “backstop” but provides 100% cover. Under this model, the benefits of investing DB assets could be shared across DB members, sponsoring employers and the (largely DC) retirement savings of those companies’ current workforces.”