“The spirit and intent of this consultation - to make it easier to share surplus for the benefit not only of members, but of all DB stakeholders - is welcome. This is a once in a generation opportunity for DB schemes to make decisions that will have a material impact on both stakeholders and members. It will also have an impact on the direction of pensions in the UK for many years to come.
The swift rise of scheme surpluses and proven alternative endgames have transformed defined benefit security, and more schemes will run on if they could share surplus more easily. However, it is important that schemes are encouraged and enabled to manage surpluses with long-term sustainability in mind. There must be mutual consent between trustees and sponsors to enable a carefully managed surplus to create value responsibly and sustainably for both parties.
“One obstacle to sharing surplus is the perceived role of trustees. Their focus on the security of accrued benefits has crowded out other considerations. Now benefits are more secure, trustees can take a holistic view. But to make a meaningful decision, trustees must be clear on their role. Given how much the DB landscape has changed, the industry need to reconsider exactly what the role of a scheme trustee is.
“It is also vitally important that the possibility of putting accrued benefits at risk and sharing surplus should have minimum conditions. We welcome, in principle, the innovative idea of a PPF underpin. We don’t consider the proposed 100% PPF underpin design attractive or a priority to stimulate productive finance nor to enable run on. Third-party capital arrangements are already creating options for well-funded schemes, which can realistically consider running on without the need for such a PPF underpin.”
Commenting on the Consultation’s proposal for the PPF to become a public consolidator, Calum continues: “A public-sector consolidator could improve member outcomes where full benefits would otherwise be at risk and is not affordable from a commercial provider. We support the PPF operating a public-sector consolidator in principle, if it fills a gap in the commercial endgame market.
Given the superfund market is now live but in its infancy, the public sector consolidator should explicitly consider how its role may evolve if new providers enter this market.
“A key unanswered question is what is the target level of security offered by a public-sector consolidator, including whether or not members benefits are at risk of being reduced if it fails. It can only complement a strong commercial market if there is clarity on the level of security offered and its remit is designed according to sound gateway principles, and if any easements to allow benefit standardisation are also available when transacting with commercial providers. A public-sector consolidator must not be a way to nationalise DB by the back door. That wouldn’t be in stakeholders’ best interests, as any indication that this could be the likely outcome would be expected to deter new commercial entrants or lead to commercial capital taking flight. In doing so it would exacerbate the very problem around commercial capacity that the Government believes a public-sector consolidator could help solve.”
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