In February 2024, the government launched a consultation seeking feedback on a range of proposals to provide better outcomes to pension savers.
Given the wide ranging and potential long-term consequences of these proposals and as an active participant in the UK Pensions industry, we have responded to this consultation. We have summarised our views below.
Columbia Threadneedle Investments is a global asset manager with over £485bn of assets under management across a wide range of strategies. Of particular relevance is our UK client book which includes over 480 UK defined benefit (“DB”) clients (as at 31 December 2023), representing around £45 billion in defined benefit pension scheme liabilities. Our clients include small (<£10m), medium and large pension schemes (£several bn+) and we also regularly engage with investment consultants and other industry participants.
We welcome the proposals set out in the consultation with the aim of enhancing outcomes for pension scheme members, their sponsoring employers, and the broader economy.
Sharing of surplus
We support the idea of surplus sharing for well-funded schemes, but we believe careful consideration needs to be given to balancing the decision to do so between trustees and sponsors. Surplus extraction represents an opportunity and risk to both scheme members and the employer and scheme members should stand to benefit from any surplus given the potential risk of running-on versus the perceived “gold standard” of bulk annuity transfer.
Whist the ability to run-on may encourage more schemes to defer turning to the buyout market, we believe these schemes will eventually seek some form of risk transfer once they are so mature that cashflow requirements dominate and/or the asset pool has diminished in size.
We believe run-on will be particularly attractive to schemes with appropriate trustee and sponsor investment expertise, alignment of trustee and sponsor views and a strong and stable covenant and where the absolute size of potential surplus to be shared justifies the ongoing costs of running the scheme.
We understand that the current legal framework makes it difficult, and in some cases impossible, to extract a surplus and welcome the proposal to facilitate this through some sort of statutory override. We note the recently announced tax reduction on surplus repayment and urge the Government to create long-term stability in any related tax rules, to match the long-term nature of investment strategy required to support run-on.
PPF Underpin
We think there are a lot of potential benefits to schemes and the broader economy from running-on, but we have some concerns about the level of the proposed PPF “Super-levy”. We believe such a levy should be forward looking and linked to investment and funding risk; should reward robust risk management and should incorporate an assessment of sponsor covenant quality. Further consultation on the data required to calculate such a levy will likely be needed to ensure consistency across the industry and robust and repeatable delivery.
A 100% underpin would largely eliminate concerns amongst members, trustees, and sponsors regarding any potential shortfall, but we have some concerns about the proposed level of 0.6%. which could create a meaningful drag on returns and therefore require a relatively higher risk investment strategy to achieve a meaningful surplus.
Public Sector Consolidator
We are supportive of the idea of offering solutions to schemes to achieve better value and governance and this may be particularly relevant to small schemes. However, we believe the role of a public sector consolidator should be to address areas of market failure. It will therefore be important to distinguish between schemes that are unable to achieve their objectives (e.g. buyout) at any price and schemes that are simply small in size. For example, we have supported several small schemes move to buy-out over recent years and so it is not clear that this cohort of the industry is unable to access the bulk purchase annuity market where they are appropriately prepared for such a transaction.
It is also important that the public consolidator does not offer more favourable pricing compared to a commercial provider on a like for like basis. If it were to, there is the risk of market distortion and scope for pricing arbitrage which may drive unintended behaviour; for example, by pro-actively making a scheme unattractive to a commercial provider (e.g. by splitting a larger scheme into smaller sections) to secure more favourable pricing through a public provider.
A maximum consolidator size threshold would seem appropriate to avoid distorting the market and negatively impacting the insurance sector. However, there is likely to be some moral hazard around limiting the size of a consolidator in aggregate or in any single year. Whilst this will limit the insurance market impact, it distorts the landscape by offering an unwarranted early mover advantage and prevents the solution from having universal application. It may even dissuade take-up entirely as a scheme could expend significant effort (and cost) preparing itself for consolidation only to find that the consolidator does not have sufficient capacity.
It is difficult to see how a public sector consolidator could operate against more favourable capital requirements than a private sector consolidator without unfairly tilting the market away from commercial consolidators.
We do not believe PPF reserves should be used to underwrite a public sector consolidator and should be limited to the PPF’s mission to protect DB scheme members in the event of sponsor insolvency.
Summary
In summary, we welcome the idea of surplus sharing amongst DB scheme stakeholders and the concept of “running-on” to create a surplus for distribution. We agree with the need to enhance the legal and tax framework required to support such action and view the possible expansion of the PPF’s role as positive. However, we urge stability in any resulting legislation and consider the suggested level of the PPF Super-levy as prohibitively high.
Whilst we are supportive of ensuring that schemes of all sizes can access appropriate end-game and run-on solutions, we have some concerns around the proposed public consolidator. There is significant scope for unintended consequence and for distorting the insurance market whilst potentially seeking to address a problem that does not exist. We think that further work is required on this aspect of the consultation.
Please do not hesitate to contact us if you would like to discuss any of these points in more detail. Furthermore, we would welcome stakeholder feedback on these topics.