Pensions Insight: 4 to 11 September 2023

In this insight we provide our usual round-up of the latest pensions developments including the PPF’s thoughts on a possible role as a public consolidator for defined benefit pension schemes and its consultation on the 2024/25 levy.

PPF round-up

PPF ‘well placed’ to operate public sector DB consolidator model

In its response to the Department for Work and Pensions (DWP) Options for Defined Benefit schemes: call for evidence (see our insight), the Pension Protection Fund (PPF) notes that the present defined benefit (DB) structure (and investment objectives) will need ‘fundamentally’ changing to achieve the Government’s objective of increased DB scheme investment in productive finance assets. This is because, at present, many closed DB schemes wish to reduce risk and volatility with a view to buying out with an insurance provider.

Increased investment in productive finance would be inappropriate given the involvement of risk and volatility and because it requires a 10-15 year investment horizon to allow return generation.

Public sector consolidation: The PPF believes that scaled up non-mandatory consolidation through removal of the reliance on covenant would allow for increased investment in productive finance (voluntary because mandatory would run counter to trustees’ fiduciary duties). Running a public sector consolidator model alongside commercial ones would help deliver increased productive finance investment. The PPF says that it would be ‘well placed’ to operate such a vehicle. Around 30% of the £32bn of assets managed by the PPF are held in gilts and another c.30% are held in productive assets, so it already has a proven track record of the type of investment profile that the Government is looking to realise with the £1.5tn of assets held in DB pension schemes. The PPF has also had success in generating material investment returns over the long-term.

Potential framework: The PPF’s response also discusses the potential framework for a public consolidator model. This would need to build in sufficient scale to be able to meet the productive finance objective but could complement the buyout and commercial consolidator market by looking at the smaller and/or weak schemes (the smallest 4,500 schemes cover £200bn or 15% of total DB assets), which commercial providers may not wish to or are reluctant to take on. However, the tighter the market, the less a public consolidator could meet the Government’s agenda.

What about schemes in deficit? The PPF notes that allowing schemes in deficit access to a public consolidator increases risk but allows them to find an ‘end-game’ solution which might not otherwise be available. Ways to deal with the inherent risks could include requiring the employer to fund the deficit with possible benefit reductions subject to a PPF-compensation floor where an employer becomes insolvent before full funding is achieved.

PPF model: The PPF sees a PPF-consolidator vehicle as having prudent funding and a standardised benefit structure with an actuarial value equivalent to full scheme benefits. Schemes would need to go through an assessment period before transfer in a similar way to the current transfer process. Care would need to be taken around this part of the structure. 

Underwriting risk: Options where additional support is needed include the Government stepping in and underwriting the PPF through its role as a compensator or through use of its reserves. There are obvious risks with the utilisation of reserves.

Investment model: The PPF believes that it could scale up its current investment allocation and has considered increasing assets under management up to £300bn. It warns against the Government being too ‘prescriptive’ as it is important that the PPF has independence.

Next steps: The PPF’s accompanying press release confirms that the PPF will liaise further with the Government and the pensions industry on the call for evidence. We will have to wait and see what the Government does next in this area – the indications to date are that it is seriously considering the use of a public consolidator model and the PPF is an obvious choice for operating such a vehicle. However, the Government may decide to wait and see if the commercial consolidator sector takes off first.

PPF 2024/25 levy consultation – proposed £100m levy

The Pension Protection Fund’s 2024/25 levy consultation reveals that the PPF expects to collect £100m in levy for 2024/25, a decrease of half from last year’s £200m – few methodology changes are proposed. This means that 99% of levy payers should see their levy reduce. The PPF is required by legislation to carry on collecting a levy despite risks reducing to cover unexpected events. It is intended that the levy will stay at £100m in coming years.

As well as asking for views on the 2024/25 levy proposals, the consultation also asks for views on the way in which the future levy can be distributed fairly among the decreasing number of schemes that pay a risk-based levy. Without changes, certain schemes may face a material increase in the levy. The PPF believes it would be appropriate to ‘spread the levy burden’ across more schemes and put forward two options for this: (1) increasing investment stresses by looking at worse economic scenarios; and (2) bringing in an additional liability factor. Other options may be required.

Section 9.2 of the consultation includes future key dates including 31 March 2024 for scheme returns and electronic contingent asset certificates, 2 April 2024 – 5pm for sending contingent asset documents to the PPF and 30 April 2023 – 5pm for sending deficit reduction contributions certificates, exempt transfer applications and certifying full block transfers.

The consultation closes on 30 October 2023.

Autumn statement to be delivered on 22 November

Jeremy Hunt, the Chancellor of the Exchequer, announced on 5 September 2023 that the autumn statement will be delivered on 22 November 2023. An Office for Budget Responsibility economic and fiscal forecast will accompany the statement as required by the Charter for Budget Responsibility. We will provide our usual round-up of pension-related measures following the statement.

Pensions Tax Manual updated for Finance (No. 2) Act 2023

On 5 and 6 September 2023, HMRC updated several pages of its Pensions Tax Manual to take account of the changes that were introduced to take effect from the beginning of the 2023/24 tax year by the Finance (No. 2) Act 2023. In summary, these changes included the removal of the lifetime allowance charge replacing it with a charge to income tax at the recipient’s marginal rate and increases to the annual allowance and money purchase annual allowance.