The Pension Protection Fund (PPF) has shared its initial views on how a public sector consolidator (PSC) could be structured, acknowledging that delivering all of the government’s objectives is "not straightforward".

The early thoughts were shared in response to the Department for Work and Pensions (DWP) latest consultation, which is seeking views on plans for a public sector consolidator operated by the PPF.

Whilst the PPF clarified that this is not a complete or definitive solution, it suggested that sharing its early thinking will support an effective debate, including through generating alternative views and challenge that help the lifeboat refine or change its proposals.

The PPF also acknowledged that delivering all of the government’s objectives is "not straightforward", clarifying that much will depend on the relative weight given to each objective.

In particular, the lifeboat pointed out that to run a substantive allocation to UK productive finance assets requires the PSC to achieve a significant scale, warning however, that the more steps are taken to achieve scale, the greater the potential impact on the market.

In light of this, the PPF's proposals outline a design that has different features to existing, commercial models of consolidation, designed to provide attractive pricing, terms and member experience to all schemes regardless of size.

However, the PPF admitted that where schemes are able to access commercially available solutions on reasonable terms, this is likely to remain their preference, including because of the ability to obtain scheme specific benefits.

And whilst the PPF suggested that there is a relatively significant ‘market’ of schemes that could be interested in a transfer to a PSC designed in this way, it acknowledged that there is "significant uncertainty" about levels of take up, especially as the commercial market is continuing to develop and innovate.

Given this, the PPF warned that there is a significant risk that the PSC will be unable to achieve scale and will not make a material contribution to the government’s wider objectives, arguing that the government would need to accept some greater impact on the commercial market than its objectives currently allow for, and elements of the proposed design would need to change.

However, given the scale of the DB sector, the PPF argued that there could be space for this while still allowing for a healthy commercial market.

PPF interim CEO, Katherine Easter, commented: “Given the £1.4trn scale of the DB sector, we believe the public consolidator can work alongside existing commercial providers, supporting a healthy market by providing an attractive option for schemes unable to access existing solutions on reasonable terms.

"We plan to engage with stakeholders both on the detailed design of the public consolidator and further viable approaches which use the PPF’s skills and capabilities; we stand ready to support the government achieve its objectives in any way we can.”

A closer look at the PPF’s key proposed design features

In particular, the PPF said that the PSC should be established as a statutory fund under the management of the Board of the PPF, and that the fund should be legally separate from the other funds operated by the PPF with no cross subsidy or pooling of funds permitted.

It also said that the consolidator should operate on a non-sectionalised basis to maximise efficiencies and economies of scale, aiming to run on, rather than act as a bridge to buy out, in order to allow the PSC to invest for growth over the medium to long term, including UK productive finance invvestments.

The PPF recommended that the PCS also be required to accept transfers from all schemes that can meet its terms, ensuring it provides a solution for schemes unattractive to commercial providers.

It also said that the consolidator should provide members of transferring schemes with the actuarial equivalent of their full scheme benefits but through a number of standardised benefit structures, rather than seeking to replicate all bespoke scheme-specific benefits, in order to support lower ongoing administration costs and help minimise the price penalty faced by small and subscale schemes.

The PPF said that the consolidator should also be required to provide at least the level of security expected of commercial consolidators – providing a secure solution for members, suggesting that the government would be the most appropriate provider of a buffer.

The PPF suggested that the consoldiator could also allow entry from schemes with a deficit on the PSC’s pricing basis, dependent on employers committing to a payment schedule to close the fixed deficit over time.

And, if the employer becomes insolvent before completing scheduled payments then member benefits would be reduced to reflect this (floored at the equivalent of PPF compensation levels).

This aims to enable the consolidator to offer a solution to schemes with deficits, who are least likely to be able to transact with a commercial provider, while protecting the funding position of the consolidator and the security of other members.

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