Round-up of recent developments in UK pensions.

Contents

PPF issues a discussion document on its role as a UK public sector consolidator

Mark Dowsey, David Robbins | March 5, 2024

On 23 February 2024, the UK Department for Work and Pensions (DWP) issued its Options for Defined Benefit Schemes consultation document, which proposed that the Pension Protection Fund (PPF) should manage the public sector consolidator (PSC) that the Government had committed to establishing by 2026. (For further details, see WTW's summary.) One week later, the PPF issued a discussion document, Public Sector Consolidator Design setting out its "initial view" on how the consolidator should operate.

Summarising what is sees as the PSC's key design features, the discussion document highlights seven points; it should:

  • Be set up as a statutory fund (as is the existing PPF) that is legally separate with no cross-subsidy
  • Be non-sectionalised, with a pooled investment fund, and aiming to run on rather than act as a "bridge to buyout"
  • Be legally obliged to accept transfers from schemes that meet eligibility criteria
  • Provide benefits in one of a number of 'standardised benefit structures'
  • Be required to provide "at least the level of security expected of commercial consolidators" – with the Government providing the 'capital buffer' or an equivalent facility
  • Admit schemes in deficit with sponsors signing up to a deficit recovery plan (with benefits reduced to a minimum of PPF compensation levels, in the event of insolvency)
  • Provide (if required) a panel of PPF-approved advisers to assist trustees in transitioning.

Benefit structure(s)

Rather than mirroring scheme benefits under the ceding scheme precisely, the PPF proposes that the PSC offer a range of standarised benefits structures that would then be certified as being of actuarially equivalent value). A ceding scheme's trustees would choose from a 'menu' covering matters such as the level of inflation (for increases to pension in payment and revaluation in deferment) and survivors' pensions – eg 50% or two-thirds of the member's pension.

Benefits in payment will be maintained at, at least, the same level and the "starting value of a deferred member's pension when they retire is projected to be the same as they would have expected to receive under their scheme". The PPF expects the PSC to match the Normal Pension Age (NPA) (or multiple NPAs where relevant) and "broadly match" annual increases under the ceding scheme albeit this might be on a different date.

The discussion document indicates that members should be able to exercise a right to transfer, provided the individual is under (their 'latest') NPA – subject to measures to protect transferring and remaining members. Similarly, ex-spouses should be able to choose between an internal credit and an external transfer in cases concerning pension sharing on divorce.

Ceding schemes would also need "to convert GMP into non-GMP as part of the standardisation exercise".

Security

The DWP's consultation paper suggested that security could come either from Government underwriting or from the reserve that the PPF has accumulated in its existing role. While DWP anyway sounded more positive about the first option, the PPF goes further; it does not consider use of PPF reserves to be a "viable alternative". Moreover, while DWP said it was likely that any Government support "would be limited and scaled to match the level of security that commercial consolidators provide", the PPF suggests that "the government could increase the level of financial support it provides to the PSC, making it a much more attractive destination" to reduce the risk that "the PSC will be unable to achieve scale".

Eligibility for a PSC and its potential market

DWP's consultation paper says that it would be difficult to establish "hard limits on eligibility...by reference to factors such as size or funding level", but that schemes might have to demonstrate "an inability to join a commercial consolidator or secure insurance buyout". In the PPF's view, it would be hard for schemes to provide such evidence; it prefers giving trustees freedom to choose between commercial solutions and a PSC with a "distinct design".

It suggests there is a "potential market" of 2,360 schemes, with £120bn of assets and 900,000 members between them, for which the PSC might the be right solution, but that only "a proportion" would be interested. Almost half of these 900,000 members are in schemes with 1,000-10,000 members, with the rest in smaller schemes.

Onboarding

The PPF would want to be able to "to onboard a large number of small schemes cost effectively and over a relatively short period of time" and believes that standardising processes, for example in contracts and data templates, coupled with access to "expert panel firms" should help both with the timely onboarding and cost. It recognises that one of the greatest challenges – as experienced in buy out and commercial consolidator cases – is data cleansing, and says the PSC should not accept data risk.

Various ways of locking scheme assets into the PSC's pricing basis are considered in the discussion document. The PSC could offer pooled funds or invest assets ahead of a formal transfer, or it might develop a "buy-in" equivalent.

WTW comment

As WTW said, when the PPF published a blog in October about the speed with which it could consolidate schemes, we suspect that the timescale might be more challenging than it anticipates. That said, most of the challenges lie not with the PPF, but with the ceding schemes. With the onus on trustees of schemes wanting to consolidate to become "PSC-ready", the actual on-boarding process should be very quick and easy. Anyone who has been involved with bulk transfers, commercial consolidation or the final journey to buy-out will know, getting to the final destination will take months if not years.

What we shall watch eagerly is the proposal to convert Guaranteed Minimum Pensions (GMPs) into non-GMP benefits and whether the existing provisions of the Pension Schemes Act 1993 will need to be followed or whether the government will change legislation to introduce a new streamlined process to aid consolidation.

If the Government were to bring forward primary legislation later in 2024 to establish the PPF as a PSC, it would be possible for it to be up and running by 2026. Quite when the first scheme would be admitted seems likely to follow some considerable time later.

The discussion document does not discuss the price of entry (other than saying, as an aside, that "we may target more attractive pricing than insurers" when the DWP document suggests that the price would in fact be meaningfully lower.) Nor does the discussion document say what might happen to any surpluses generated, which might reasonably depend on the level of taxpayer backing. These factors, when considered alongside the level of security, will influence how attractive the PSC is to potential entrants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.