The Pension Protection Fund (PPF) has today published its response to the Department for Work and Pensions’ (DWP) call for evidence on Options for Defined Benefit (DB) Schemes. The call for evidence was issued on the back of the Chancellor’s Mansion House Reforms announced on 10 July. It sought input on how DB pension schemes, and the PPF, could support greater productive investment in the UK.
The government’s objectives, as set out in its Mansion House Reforms, are to: increase pension scheme productive investment (ie. in alternative asset classes such as infrastructure, private equity and equities which support the wider UK economy); secure the best outcomes for members; and preserve a strong and diversified gilt market.
Kate Jones, PPF Chair, says: “With almost £1.5 trillion in invested assets, defined benefit schemes could play a major role driving greater productive investment in the UK economy whilst securing good member outcomes. However, this is unlikely to happen under the current framework – a step change will be needed in the DB market to deliver this.”
As the DB sector matures and more schemes target insurer buy out, trustees and employers are increasingly seeking to reduce investment risk and volatility. Improved scheme funding in recent years, driven by higher interest rates, will further accelerate the trend for closed, corporate, DB schemes to de-risk.
If DB schemes are to increase their appetite for productive investment – which requires investing over a 10-to-15-year period and accepting more risk and volatility – investment objectives will need to be changed. Options which seek to realign incentives within the current framework – such as enabling easier access to scheme surpluses – are unlikely to meet the government’s productive finance objectives, concludes the PPF.
Oliver Morley, PPF CEO, says: “To achieve the government’s goals at scale, including driving a material change in DB allocations to productive investment, consolidation must be an integral part of the solution. We believe the Public Sector Consolidator option could substantially deliver against the government's objectives, complementing existing commercial solutions, and we’d be well placed to run such a Fund.”
Drawing on its 18-year experience consolidating over 1,000 DB schemes, the PPF sets out its thinking on how a Public Sector Consolidator solution could be designed, structured and set up. It additionally sets out how its own investment approach and asset allocation acts as a blueprint for what could be achieved. The PPF currently has over £32bn in assets under management, of which c.35 per cent is allocated to gilts and c.30 per cent to productive assets (over two thirds of which are in the UK).
Oliver Morley added: “Running a Public Sector Consolidator would be a natural evolution of the PPF’s existing capabilities. Through our investment approach the PPF already provides a blueprint for how the government’s objectives can be delivered at scale. We’re a major buyer of UK gilts, invest heavily in productive assets and, by investing for growth over the long term, we’ve delivered greater security for our members.”
While the PPF will continue to deliver for its current members and levy payers, it plans to engage further with government and industry on this Call for Evidence over the coming months.
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