On the first part of the consultation (treatment of surplus), XPS has expressed support for changes to surplus rules where these could lead to better outcomes for members and employers, but has emphasised the need for Government to move quickly and effectively if the changes are to make a positive difference.
Commenting on the consultation response, Tom Froggett, Senior Consultant at XPS, said: “We are already working with trustees and employers to take a step back and assess their strategy ahead of the new funding and investment strategy rules coming into effect from September 2024. We need certainty on surplus rules so that trustees and employers can move forward with confidence in their strategy. We also need simplicity, because complex solutions requiring significant legislative change will take a long time to implement and this will not provide the clarity that trustees and employers are already looking for.
“We think a simple, actionable and effective recipe would be the introduction of a statutory override to allow payment of surplus to the employer, conditional upon agreement between the employer and trustees, and the creation of a code of practice from TPR that sets out guidance on the key protections that trustees should consider if running on. Those protections are critical in making this work, and should include linking the level at which surplus can be extracted to the full package of support being provided to the scheme, including contingent assets, investment strategy and a requirement to manage an orderly wind-down to insurance buyout if circumstances change such that running on is no longer appropriate.”
XPS’s response was informed by the results of a recent XPS survey of trustees and employers representing DB schemes with an estimated £420bn of assets (approximately one-third of the entire market), which found significant support for running schemes on provided appropriate safeguards were in place.
On the second part of the DWP consultation (the introduction of a public sector consolidator), XPS expressed concerns about Government proposals in their current form, and instead outlined an alternative role that the PPF could play to enhance the positive impact it has already had for schemes with insolvent employers.
Tom Froggett, Senior Consultant at XPS, commented: “Over the last 20 years the PPF has been a huge success story in protecting the pensions of nearly 300,000 members of schemes with insolvent employers. We think the PPF could extend this role by overseeing schemes that cannot secure full member benefits upon employer insolvency to get them towards full benefits over time, rather than the current situation of locking into reduced benefits for members via a ‘PPF plus’ insurer buyout.
“However, we have a number of concerns about going further than this by forming a public sector consolidator for schemes with solvent employers. These include the exposure of taxpayers to pension risks of solvent sponsoring employers, and the fairness of asking taxpayers to underwrite DB pension risks when many taxpayers are in less generous DC schemes. We also see a lack of evidence for the need for a public sector consolidator and have concerns about distorting a well-functioning commercial market, particularly if schemes in deficit are allowed to enter the consolidator.”
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