Getting DB schemes to take more investment risk requires ‘secret sauce’ of enhanced PPF protection for members

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With Tuesday (5th September) seeing the closing date for responses to the various Mansion House consultations issued by the government at the start of July, LCP have submitted a reply to the DWP’s consultation on options for DB schemes making the case for a new ‘opt-in’ regime which would provide full protection for member benefits via the PPF. 

There is widespread concern across government and the pensions industry that nearly £1.5 trillion of DB assets is not being invested as productively as it could be.  But after a decade of regulatory pressure to de-risk and move towards an ‘end game’ of buy out with an insurer, LCP argue that it will take more than words of encouragement from government to get schemes to take a different approach. 

In their consultation response, LCP highlight the fact that there are two main barriers to large, well-funded schemes being willing to take on more investment risk and invest for the long-term in productive finance - things like infrastructure and unlisted equity: 

  • Trustees are focused on getting member benefits paid and have little reason to explore anything which might increase the downside risk on investments; 
  • Sponsors see little advantage in targeting higher returns which would act to build up ‘trapped’ surpluses which they cannot access until schemes wind up, and even then not with any certainty and subject to penal tax. 

In response to these twin barriers, LCP have proposed a two-part package solution which forms the basis for part of the Government’s consultation.   These ideas have been discussed with government ministers, civil servants and regulators over the last 12 months.  The key changes proposed are: 

  • The introduction of a new opt-in regime whereby the sponsors of well-funded schemes could choose to pay an additional PPF ‘superlevy’ which would ensure 100% of member benefits were protected in the event of sponsor insolvency; 
  • Changes to the rules around the extraction of surpluses, allowing sponsors in this new regime to extract surpluses from ongoing schemes once funding reached a target level;   

LCP argue that trustees will be keener to explore taking on more investment risk if they know that member benefits are now fully under-written through enhanced PPF protection.   And sponsors will also be keener to run a scheme on targeting higher rates of return because they potentially share in the upside much sooner.   

LCP expect that the enhanced surpluses expected from this new structure could benefit current DB members, through discretionary increases, the DC generation, through higher rates of employer contributions, as well as the UK economy and British industry. 

In their consultation response LCP also discuss the separate proposal by the Tony Blair Institute for up to 4,500 DB schemes to be consolidated into the PPF, with all assets and administration being moved across.   LCP point out that this would be a massive undertaking, with PPF having to carry out individual assessments of each scheme and understand the unique benefit structures and rules of each, as well as undertaking a data cleanse before scheme transfer.    

LCP also point out that a focus on smaller schemes could mean that a huge amount of effort is expended on consolidating large numbers of small schemes with little impact on the overall amount of productive investment.   Their consultation response shows that the smallest 2000 DB schemes currently have assets of around £15bn between them whereas a single large DB scheme can have more assets than this.    

Commenting, Jonathan Camfield, partner at LCP said: 

“There is widespread agreement that DB pension fund assets could be invested more productively.  But trustees have little incentive to agree to any form of re-risking if this puts member benefits at greater risk.  In our view the ‘secret sauce’ which would unlock this barrier would be the creation of a new PPF regime allowing sponsors to opt in to 100% protection of member benefits.  Only with this security will trustees be more willing to take a fresh look at scheme investment strategy."   

“We are delighted the government is consulting on our proposals to achieve this and in our response we are calling on the government to make the required regulatory changes that will in turn enable a step change in pension scheme productive finance that we believe has the potential to be worth £100bns to the UK economy.”. 

“Other ideas for DB reform have been proposed, but all of these seem to involve a huge amount of time and effort moving the assets of smaller pension schemes into a central consolidator like the PPF.   Yet most DB assets are not sitting in small pension schemes.   If the government is serious about getting DB assets more productively invested now, it should start with the biggest and best funded schemes, and should enable the assets to be more productively invested where they are, rather than be distracted by moving around the assets of the smallest schemes”. 

LCP is holding a webinar on Monday 4th September to discuss the Mansion House proposals, and will be joined by Work and Pensions Committee chair, Sir Stephen Timms MP.  More details are at: Powering possibility in pensions: Mansion House reforms – time for change in DB pensions | Lane Clark & Peacock LLP (