The Pensions Regulator (TPR) has stated in its press release Poor-value schemes are wound up as TPR takes tough action that Value for Members (VfM) assessments are driving consolidation in relevant schemes with total assets below £100 million. (These are schemes that provide any non-AVC money purchase benefits.) It reports that trustees of 16% of relevant schemes from its pilot compliance initiative have concluded that they “do not offer good value”, leading them to opt for winding up. TPR also reports that it has fined a corporate trustee £12,500 for non-compliance, signalling that “further fines will be issued shortly”. In the Spring Budget, the Government reaffirmed its commitment to implement a VfM framework across the entire defined contribution (DC) market. The Financial Conduct Authority’s proposals for VFM in contract-based schemes are expected in the spring and TPR has previously encouraged trust-based schemes to engage with this consultation “so that there are no barriers to implementing the [VfM] framework in the trust-based environment.”.
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On 23 February 2024, the UK Department for Work and Pensions (DWP) issued its Options for Defined Benefit Schemes consultation document, which proposed that the Pension Protection Fund (PPF) should manage the public sector consolidator (PSC) that the Government had committed to establishing by 2026. (For further details, see WTW’s summary.) One week later, the PPF issued a discussion document, Public Sector Consolidator Design setting out its "initial view" on how the consolidator should operate.
Summarising what is sees as the PSC’s key design features, the discussion document highlights seven points; it should:
Rather than mirroring scheme benefits under the ceding scheme precisely, the PPF proposes that the PSC offer a range of standarised benefits structures that would then be certified as being of actuarially equivalent value). A ceding scheme’s trustees would choose from a ‘menu’ covering matters such as the level of inflation (for increases to pension in payment and revaluation in deferment) and survivors’ pensions – eg 50% or two-thirds of the member’s pension.
Benefits in payment will be maintained at, at least, the same level and the “starting value of a deferred member’s pension when they retire is projected to be the same as they would have expected to receive under their scheme”. The PPF expects the PSC to match the Normal Pension Age (NPA) (or multiple NPAs where relevant) and “broadly match” annual increases under the ceding scheme albeit this might be on a different date.
The discussion document indicates that members should be able to exercise a right to transfer, provided the individual is under (their ‘latest’) NPA – subject to measures to protect transferring and remaining members. Similarly, ex-spouses should be able to choose between an internal credit and an external transfer in cases concerning pension sharing on divorce.
Ceding schemes would also need “to convert GMP into non-GMP as part of the standardisation exercise”.
The DWP’s consultation paper suggested that security could come either from Government underwriting or from the reserve that the PPF has accumulated in its existing role. While DWP anyway sounded more positive about the first option, the PPF goes further; it does not consider use of PPF reserves to be a “viable alternative”. Moreover, while DWP said it was likely that any Government support “would be limited and scaled to match the level of security that commercial consolidators provide”, the PPF suggests that “the government could increase the level of financial support it provides to the PSC, making it a much more attractive destination” to reduce the risk that “the PSC will be unable to achieve scale”.
DWP’s consultation paper says that it would be difficult to establish “hard limits on eligibility…by reference to factors such as size or funding level”, but that schemes might have to demonstrate “an inability to join a commercial consolidator or secure insurance buyout”. In the PPF’s view, it would be hard for schemes to provide such evidence; it prefers giving trustees freedom to choose between commercial solutions and a PSC with a “distinct design”.
It suggests there is a “potential market” of 2,360 schemes, with £120bn of assets and 900,000 members between them, for which the PSC might the be right solution, but that only “a proportion” would be interested. Almost half of these 900,000 members are in schemes with 1,000-10,000 members, with the rest in smaller schemes.
The PPF would want to be able to “to onboard a large number of small schemes cost effectively and over a relatively short period of time” and believes that standardising processes, for example in contracts and data templates, coupled with access to “expert panel firms” should help both with the timely onboarding and cost. It recognises that one of the greatest challenges – as experienced in buy out and commercial consolidator cases – is data cleansing, and says the PSC should not accept data risk.
Various ways of locking scheme assets into the PSC’s pricing basis are considered in the discussion document. The PSC could offer pooled funds or invest assets ahead of a formal transfer, or it might develop a “buy-in” equivalent.
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