DWP consultation on possible surplus removal changes and the PPF as a public consolidator

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In this insight we provide an outline of the key points from the Department for Work and Pensions’ (DWP) consultation on its proposals to make it easier for schemes to distribute surplus and to set up the Pension Protection Fund (the PPF) as a public consolidator for schemes that are unattractive to commercial consolidators.


On 23 February 2024, the DWP published its Options for defined benefit (DB) schemes consultation which follows on from its July 2023 DB options call for evidence (closes on 19 April 2024). The consultation forms part of the Government’s Mansion House reforms and productive finance agenda under which it wishes to see the “£1.4 trillion held by [DB] pension schemes…work harder for savers and wider economy”.

(Productive finance is not legally defined but refers to investment that can increase productive capacity, increase growth, and contribute to the economy, in this case in the UK – for example, plant and equipment, research and development, infrastructure and private equity.)

The consultation requests views from the pensions industry on changing the rules on surplus to make it easier for employers and members to access the £200bn aggregate surplus it estimates schemes currently have and to consolidate the DB scheme sector through the PPF acting from 2026 as a public consolidator for the transfer of schemes that are unattractive to commercial consolidators. The Government sees both as allowing for increased investment in productive finance.

On 1 March 2024, just a few days after the consultation document the PPF published its initial views on the structure of the public consolidator (the PPF Discussion Document) – this tracks to a large extent the consultation with more detail on certain points and an insight into the PPF’s views on particular elements. It is designed to “support an effective debate, including, through generating alternative views and challenge that help us refine or change our proposals”.

Further details


If introduced, these changes could represent a marked shift from a focus on de-risking to achieve buyout to running on with an associated change in investment strategy designed to produce surplus – we will have to wait and see whether employers have an appetite for run on given the move to surplus represents a fairly recent shift in the market and employers may still wish to de-risk completely.

Government’s objectives

The Government understands that there are both practical and behavioural obstacles to distribution of surplus that need to be addressed. Underlying the proposals is the belief that easing surplus access will make it more attractive for schemes to fund to surplus levels and increase investment in productive finance knowing that surplus can be accessed and not locked in.

Key proposals

There are three key proposals: (1) surplus should only be removed where members’ benefits are sufficiently protected; (2) trustees will remain responsible for scheme funding; and (3) removing surplus will not be made conditional on utilising scheme funds for specific purposes.


Statutory override: The consultation seeks views on statutorily allowing schemes where necessary to amend their rules to permit surplus extraction. There are questions on whether this would ‘encourage’ surplus removal, the structure of any statutory override and potential effects on the buyout market. This would assist the current position whereby some schemes are prevented from distributing surplus because their rules do not allow it.

Taxation: The Government is reducing the tax charge on authorised surplus repayments from 35% to 25% from 6 April 2024 in the hope that this will help drive forward its plans. The Government is asking whether other tax changes are needed which currently limit the ability to return surplus, for example, allowing schemes to return surplus to members as a one-off payment without this being unauthorised.

Safeguards for member benefits: The Government is considering easing the requirement for a scheme to be fully funded on a buyout basis before it can distribute surplus to an employer to a less prudent basis. The consultation asks questions as to what a less stringent but still prudent appropriate funding level might be. TPR will provide trustee guidance on relevant considerations.

Alternative safeguard: 100% PPF underpin: The Government is still keen to explore allowing employers to pay a higher PPF levy in return for the PPF providing 100% compensation levels should the employer suffer a qualifying insolvency event. It wishes to know whether this would encourage surplus extraction and if employers still see merit in this.

PPF as a public consolidator provider

The PPF Discussion Document summarises the key design features that it believes a public consolidator could have – these pretty much track the features set out in the consultation.


The Government wishes to set up the PPF as a public consolidator for schemes that are unattractive to commercial consolidators (buyout providers and superfunds). Such schemes are typically those at the smaller (and smaller and less well funded) end but can sometimes include larger or more complex schemes. The Government has noted that some of these types of schemes face difficulties accessing buyout (or superfunds).

As the PPF Discussion Document notes, the public consolidator would not restrict which schemes could transfer – it could operate in a similar way to Nest (a public body set up within a competitive market) but would need to consider market failure.

The consultation notes that the public consolidator would increase pension fund investment in ‘high-growth UK assets’ (through expectations on its investment strategy) and its structure is designed to ‘minimise distortion’ of the commercial consolidator sector and to protect member interests.


The Government is thinking of setting the public consolidator statutory objectives to provide an offering for “schemes unattractive to commercial consolidation providers” and imposing public duties.

There would be underpinning eligibility criteria making entry dependent on being able to show that the scheme cannot access a commercial consolidator or buyout with a possible restriction on the overall or annual size of the consolidator to avoid ‘overexpansion’.

Proposed model structure

The proposal is that the link between the employer and the scheme would be removed upon transfer unless the scheme is underfunded in which case the employer will have to pay off the deficit. It is also intended that the consolidator will be set up on an unsegregated pooled basis so that it can achieve economies of scale and should ‘run on’ as opposed to aiming for buyout (to allow for investment in a wide range of asset types including UK productive finance).

Benefit structure

The plan is that the consolidator will use a limited number of standardised benefit structures so will provide members with an actuarial equivalent of full scheme benefits. This will help ensure that a large number of small schemes can be onboarded in a cost effective and timely manner and will allow the cost premium of commercial consolidation to be reduced/ removed.

The PPF Discussion Document provides further detail on the standardised benefits that could be offered including the same level of benefits for existing pensioners, the same projected starting value for a deferred pension at retirement, matching normal retirement age to the scheme, broadly matching pension increases and ‘generous’ survivor benefits. Unusual scheme benefits would need to be adapted subject to providing actuarial equivalence.


The consolidator will be set up as a statutory ring-fenced fund administered by the Board of the PPF.


To provide sufficient member protection and to prevent unfair competition with commercial consolidators, the proposal is for the public consolidator to operate on the same funding requirements as commercial providers. The entry price will be set in conjunction with the target funding basis.

Treatment of entering scheme deficits and surplus

As noted above, the employer of a scheme transferring with a deficit would have to contract to pay off the deficit in instalments and schemes in surplus could either share the surplus before transferring or buy higher consolidator member benefits.

Schemes in deficit would need to be ringfenced. If the employer goes insolvent before meeting the deficit in full, members’ benefits would reduce accordingly but not below PPF compensation levels (and the idea is that members would be able to access the standard PPF by the consolidator paying a levy.


In line with commercial consolidators, the PPF consolidator will have to be fully funded on a prudent basis. As part of this (and to keep an attractive entry price), underwriting will be needed (this is provided to commercial consolidators through a third-party capital buffer).

It is envisaged that public consolidator underwriting would be provided either through the Government (which would give it more underlying control and allow it to require investment in UK productive finance) or by using PPF reserves (currently £12bn). Both have inherent risks – Government underwriting, possible unfair competition and PPF reserves, risk to the existing PPF model and restrictions on investment.

The PPF believes that the Government (not PPF reserves) should provide the underwriting buffer.

Panel firms

The PPF wants trustees to be able to use appointed panel firms with standardised processes to run the transfer – the PPF use panel firms for the assessment period process, and this helps to drive efficiencies including on costs and time.


The PPF Discussion Document considers how schemes can be onboarded and the best way to do this taking into account issues on the method and timings of data cleansing (needed to confirm benefits prior to transfer and because the public consolidator will not take on data risk) and the logistics of agreeing price.

Potential take-up and impacts

The consultation includes a survey for DB schemes to obtain details on possible uptake, current issues with accessing buyout/ superfunds and the potential effect of the surplus/100% PPF underpin and public consolidator on schemes.

The PPF Discussion Document notes that, although the PPF believes there are lots of schemes that could potentially wish to transfer to a public consolidator, there is material ambiguity over take-up levels – this means there is a risk of insufficient scale to meet the Government’s objectives and the Government will need to ‘accept’ that the commercial sector may be affected to a greater extent than currently allowed for and change the design accordingly (for example, providing greater financial support to increase attractiveness) – the PPF thinks this can be done without detrimentally affecting the commercial sector although the objectives of the public consolidator could well end up moving away from “focusing just on schemes unattractive to commercial providers”.

Concluding remarks

Only time will tell if the Government’s plans on surplus and a PPF public consolidator will have their intended effect and support its productive finance agenda (through schemes either changing their investment strategies or from investments made by the PPF consolidator vehicle).

What we do know is that with the recent improvements in scheme funding, many more schemes are now able to think about the endgame – if scheme funding continues to improve more schemes will be able to buyout/ transfer to a superfund (or decide to run-on with surplus). This plus the possibility of a consolidator vehicle for smaller (and smaller underfunded) schemes means the DB pensions sector may look very different in the next 5-10 years than it does at present.

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