Perspectives

Jeremy Hunt's plan to expand the remit of the PPF: like filling a swimming pool with a teaspoon

The Chancellor proposes to expand the role of the PPF to become a consolidator of smaller DB schemes, as part of a broader strategy to unlock pension capital for economic growth, but will it work and is it the right appraoch anyway?

Last week, the Financial Times, Josephine Cumbo, Ian Smith and George Parker revealed Jeremy Hunt's plan to broaden the PPF's role (click here to link to the article).

Summary

The proposal is to expand the PPF into a smaller DB scheme consolidator, facilitating more sophisticated investment pension strategies and spurring economic growth.

Insurance executives and industry experts such as Yvonne Braun and Nigel Peaple fear this state-backed competitor to the consolidation and buyout markets, may disrupt commitments to long-term investment, and introduce moral hazard.

Newgen's view

The smallest 80% of schemes hold only 10% of assets, making this policy seem inefficient. Time and effort spent consolidating may not significantly impact economic growth.

Many of the issues mentioned are already solved commercially in the market. Smaller DB schemes have access to sophisticated investment strategies through #fiduciarymanagement (see Rebekah Bennett and Bob Campion, CFA at Charles Stanley Fiduciary Management). There are insurance-backed solutions for enhancing sponsor covenants as a balance to increasing investment risks (see Vicky Casebourne and Nikesh Patel at Van Lanschot Kempen Investment Management). Commercial consolidators are now a market reality (see Clara-Pensions).

Why do it?

Public sector inefficiency and superfluousness are nothing new, but we need caution when introducing uncertainty and disruption to functioning markets for no obvious material benefit. How did the proposers overlook the UK DB market's structure? Maybe the PPF, with its low-risk portfolio and steady income, seeks more action. If they are so confident in their investment prowess, why not spin-off?

What to do?

The issue isn't scheme size, so much as groupthink and valuation metrics. Aligning the risk and return incentives of sponsors, trustees and members with those of the government is key. Current regulations permit a great deal, HMT needs to tell TPR not to put permitted but non-traditional discount rates through such high levels of scrutiny.

If the Treasury wants to leverage the PPF perhaps they should consider a way to ensure full benefits in return for an increased levy, as suggested by Sir Steve Webb of LCP.

And finally...

However, all the above focuses on this week's Autumn Statement. With Labour currently 8 to 1 on, to be the largest party at the next election, perhaps it is less Jeremy Hunt's, and more Rachel Reeve's opinions that matter.

Sooner or later, some bright spark will work out that there is £364bn in LGPS funds. It is going to be tempting to nationalise the lot, bring the assets onto the books and disappear the liabilities into the never-never of public accounting "a la Royal Mail".

I'm no fan of nationalisation, but whichever Chancellor does that will be filling up their Productive Capital swimming pool with a firehose rather than a teaspoon.