PPF as consolidator raises questions
In the response to its call for evidence on Options for DB schemes, the government confirmed it wants to establish a public sector consolidator by 2026, focusing on smaller DB schemes that are unattractive to commercial providers. Its preferred option is to expand the role of the Pension Protection Fund (PPF) to enable it to deliver this new consolidator vehicle.
The government plans to launch a consultation this winter to consider the design of and eligibility for such a consolidator. In the meantime, several important questions remain unanswered. One of the fundamental questions being – what sort of consolidator does the government have in mind?
What type of consolidator?
At one end of the spectrum there is the possibility of establishing a pooled investment vehicle for smaller DB schemes, which is operated and managed by the PPF. The Chancellor may have been hinting at this when he said in his Autumn Statement speech that he wanted to open the PPF up as an “investment vehicle” for smaller DB pension schemes.
In the middle sits the option of setting up a DB master trust run by the PPF. With this smaller DB schemes could transfer their assets and liabilities to the PPF-run master trust. Services could then be aggregated (including administration) and, potentially, investments pooled.
Crucially, however, under both these models a scheme’s employer(s) would remain on the hook for any funding shortfall and this model would not prevent benefits from ultimately being bought out or transferred to a superfund.
At the other end of the spectrum, the government could establish a fully-fledged consolidator (or ‘superfund’) for smaller DB schemes run by the PPF. This reflects the language used in the original call for evidence which talked about “breaking the employer link” and highlighted the potential impact a public consolidator might have on the bulk annuity market.
The further you move along this spectrum, the greater the legal risks and practical challenges for the PPF.
Key legal risks
From a legal perspective, one of the key questions that will need to be answered is: will the link to a scheme’s employer(s) be broken?
If the link is severed, this would mean the PPF consolidator would be responsible for ensuring members’ benefits are paid in full without recourse to further employer contributions should the need arise.
Before establishing this structure, the government would need to think carefully about:
the funding level a scheme would need to achieve before it could enter the PPF consolidator
the extent to which a ‘buffer fund’ is required to address any future funding shortfalls, and
how any buffer would be funded (e.g. could this include private capital or even be an investment made by the PPF using its existing funds).
It would also need to be clear what would happen if members’ benefits could not be paid in full. While perhaps unlikely (particularly if the steps above are addressed up front), this would potentially put the PPF into a double role of consolidator and lifeboat. Assuming members would ultimately be protected by the PPF’s existing compensation fund in this scenario, how would any internal conflicts within the PPF be managed?
Another key question is which schemes will be eligible to enter the PPF consolidator?
The government has said this will be targeted at smaller DB schemes that are unattractive to commercial providers. Therefore, it seems likely the government will set a maximum size threshold (e.g. based on the value of assets under management) for eligible schemes.
The government is also likely to draw inspiration from the “gateway test” for superfunds to identify those schemes that have slipped through the commercial provider net. Under that test, a scheme is deemed to be unable to access the buy-out market where an insurer declines the scheme or advises buy-out could not be completed within a reasonable period.
Practical challenges
If the PPF takes on responsibility for paying members’ benefits (which would be the case under the second and third options outlined above), it will be taking on a completely new challenge.
Currently, where an underfunded scheme enters the PPF its members receive compensation in a standard form prescribed by legislation. However, if the PPF as consolidator assumes responsibility to pay benefits based on each scheme’s particular rules, it will need to be ready to manage and administer a large variety of benefit structures, which might include the exercise of discretion.
If the government decides to set up a public DB master trust, the PPF would also need to manage the ongoing relationship with scheme employers which could include agreeing a scheme’s long-term funding and investment strategy and negotiating recovery plans if a funding deficit emerges.
Will this happen?
The government appears to be committed to the idea of establishing a public consolidator. The PPF has also confirmed it is ready and willing to take on this role. However, a lot will happen between now and 2026, including a General Election.
Therefore, while the current government is committed to taking this forward, the most critical unanswered question is does this idea enjoy cross-party support? If it does, significant primary legislation is likely to be required to implement the proposal and there are lots of competing policy developments that also require parliamentary time.
Francois Barker is a partner and Vanessa Wells is a legal director at Eversheds Sutherland.
