The Department for Work and Pensions has encouraged the Pension Protection Fund’s board and executive to consider seeking authorisation by the Financial Conduct Authority, either for the PPF itself or for a subsidiary.
Led by the Pensions Regulator’s former chief executive, Lesley Titcomb, the DWP’s review of the PPF also urged the fund to adopt a more public profile and share details on its investment approach.
It yielded the suggestion that the lifeboat fund scrap its administration levy, it instead being allowed to recover its administrative costs via its own levy.
The PPF confirmed earlier in December that defined benefit schemes will see the levy they pay to the lifeboat fund slashed by £420mn in two years, confirming tweaks to its methodology and further work to make legislative changes.
The continued existence of the administration fund is an unnecessary complexity
Lesley Titcomb, DWP review
“I have found the PPF to be a well-run public body offering high standards of service and value for money to those who use it and pay for it,” Titcomb wrote in the review, which was carried out over the first quarter of 2022 and published on December 21.
“My recommendations are therefore limited in number, focusing on areas where there is an opportunity to enhance rather than a need to rectify,” she continued.
“In particular, there is an opportunity for the PPF to share its good practice in certain areas more widely, and an opportunity for the DWP and the PPF to consider whether it and its expertise can be used in other ways for public benefit.”
For the greater good
The PPF recently published a new three-year strategy, in which it committed to changing its compensation regime in response to new court rulings and legislation, as well as reviewing the methodology used to calculate its levy. On December 13, the fund said that 98 per cent of schemes will pay a smaller levy in 2023-24.
The DWP’s review of the PPF praised the lifeboat’s funding strategy, suggesting that its reserves were sufficient to “provide a high degree of probability that it will be able to provide any compensation which might be required for the population of savers in DB schemes”.
The review also acknowledged the health of the relationship between the DWP and the PPF, suggesting that the two organisations explore ways in which the lifeboat fund can use its skills for the benefit of the public.
It said this could include managing investments for the government, or “acting as a consolidator or provider of aggregated services for schemes which would benefit from this, but which are not attractive to commercial consolidators”.
It also suggested that the PPF board considers commissioning an independent review of the fund’s investment strategy and asset allocation. The PPF manages £38bn in assets, half of which are managed in-house, “including a significant amount of liability-driven investment”, the DWP review noted.
The PPF too faced the challenges of the autumn gilt market crisis, which saw DB schemes scrambling for liquidity in order to meet collateral calls made by their LDI managers.
“I understand that the PPF managed the collateral calls it faced over this period successfully,” Titcomb wrote.
Should the FCA authorise the PPF?
The PPF was encouraged to share details on its investment approach, particularly with regards to its responsible investments, and was also urged to work with others to encourage investment in alternatives.
“The board and executive should consider whether it would be appropriate to seek FCA authorisation and regulation for either the PPF itself or a dedicated subsidiary, given the increased significance of the investment management function,” the review continued.
It recommended abolishing the administration levy, with administrative costs covered instead by the PPF’s own levy.
“The administration levy is less transparent and appears to be an unnecessary complication for both the PPF and its stakeholders,” the DWP said.
The fund held by the department currently stands at around £30mn, with the annual allocation to the lifeboat over the past few years averaging £14mn.
“It appears to me that the continued existence of the administration fund is an unnecessary complexity and creates an extra layer of accountability to the DWP, which does not sit well with the PPF’s status as a public corporation,” the review said.
It also suggested that the lifeboat fund works with the DWP to ensure that the PPF’s annual levy can be easily reduced, but reintroduced or raised again should this be necessary. The levy accounted for 23.1 per cent of the PPF’s funding in the 2020-21 period, with a larger part of its funding coming from schemes’ assets being moved into the PPF and investment returns.
PPF confirms levy reduction and methodology changes
Defined benefit schemes will see the levy paid to the Pension Protection Fund reduced by £420mn in two years, as the lifeboat fund confirms tweaks to its methodology and further work to make legislative changes.
Currently, the levy cannot be increased by more than 25 per cent of the prior year’s total, and it would not be possible to raise a further levy if it was reduced to nothing.
The DWP also observed that the PPF board rarely hears from the members who receive compensation from the lifeboat. It suggested that it considers how it could hear more directly from its membership.
The DWP pledged to work with the PPF in order to implement its recommendations, committing to a subsequent review in the spring of 2023.
