The Pension Protection Fund (PPF) has said that is ready to support, and if needed deliver, any suitable solutions to drive better member outcomes, suggesting that further consideration should be given to the consolidation of small schemes.

In its response to the Work and Pension Committee’s defined benefit (DB) inquiry, the PPF said that consolidation of small schemes could lead to better outcomes through economies of scale, greater professional trustee oversight and administrative expertise.

In addition to this, it argued that consolidation could improve investment management and provide access to a larger range of assets, arguing that employers of small schemes would also be freed from the ‘burden’ and risks of scheme management. 

"We think there is merit in considering the role consolidation might play in supporting smaller schemes, and a wider opportunity to start discussing the possibility of system changes to achieve the best possible outcome for members in the sub-set of stressed schemes," the PPF stated.

“Given our unique capabilities, skills, and experience – in asset management, pensions administration and winding up and transferring schemes – we stand ready to explore, and if required to actively support, the development of any potential solutions in this area."

In addition to this, the PPF noted that while recent funding improvements and subsequent focus on endgame could drive more investment allocation towards a narrower range of assets, the consolidation of DB schemes could broaden scheme investments.

The PPF acknowledged that there has been increased interest, and encouragement, from policy makers for pension schemes to increase their domestic investment – particularly in alternatives such as infrastructure and private equity – with a view to supporting the wider British economy.

And whilst the PPF noted that policy action has focused more towards supporting DC, rather than DB, funds, it suggested that the consolidation of DB schemes could shift scheme investments to a PPF-like approach. 

"Consolidation of DB schemes could shift scheme investments to a PPF-like approach," it stated.

"Consolidation can provide scale and access to best-in-class asset management. In addition – by severing the link to the employer – consolidation can support a change in investment objectives, away from reaching a particular endgame as quickly as possible towards growing value over time. Altogether we believe this would lead to investment in a much wider range of asset classes."

The Pensions Regulator's response to the WPC inquiry agreed that greater consolidation in the DB market has the potential to bring significant benefits, also stressing the need for any legislation in this area to be given broad consideration, including what role a PPF-style consolidator could play in filling gaps and complementing market-led solutions.

The comments come amid reports that government ministers are considering extending the PPF's remit to struggling corporate defined benefit (DB) pension schemes, with a report from the Tony Blair Institute also calling for an expansion of the lifeboat.

Commenting in response to these reports at the time, PPF chief executive, Oliver Morley, said, “We are aware of the growing debate around the future of DB schemes, including the role consolidation could play in improving member outcomes and supporting the UK economy.

“The report from the Tony Blair Institute, like the recent departmental review of the PPF, recognises our unique capabilities in this area.

“We welcome the chance to work with government and the wider industry to explore the various options and be part of the potential solution.

“We would also want to reassure our current members, and levy payers, that delivering the best outcomes for them remains our priority.

“As a statutory corporation set up by the Pensions Act 2004, any potential future changes to our role would likely require legislative change. As such, this would principally be a matter for policy makers."

Inflation concerns persist

The PPF's response to the inquiry also addressed member outcomes, with the lifeboat emphasising that it is “acutely aware” of the impact high inflation may have on members, especially those whose compensation relates solely to pre-97 pensionable service.

Whilst the level of compensation is set out in legislation, the PPF confirmed that it has seen an increase in queries from members, MPs, and trade unions on this issue, many of which have centred on the absence of increases applied to compensation in payment that relates to pensionable service before 6 April 1997.

Given this, the PPF shared analysis on what the impacts would be if the law were changed to introduce indexation on compensation linked to pre-97 service, revealing "significant" financial impacts for the PPF and wider implications for DB schemes.

In particular, the PPF revealed that indexing pre-97 compensation in the future at CPI subject to a cap of 2.5 per cent would increase current liabilities by £4.3bn, reducing the PPF’s funding level by 17 percentage points.

The PPF also warned that this could prompt an increase in the number and size of claims the lifeboat would receive in the future, as more schemes that enter an assessment period would be expected to be in deficit on the s143 basis7 and therefore transfer to the PPF.

In addition to the financial impact, the PPF noted that there would be broader implications of any change in indexation, warning that, if there was no corresponding change to the level of pre-97 pension increases offered by all other DB schemes, the benefits offered by the PPF might become more generous than those offered by the scheme itself.

Equally, however, if indexation was only paid to those PPF members who had it in their original scheme rules, this would add a layer of complexity which would go against the underlying principle that the PPF is a simple regime.

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