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The government is pushing ahead with a controversial proposal to expand the role of the UK’s pension lifeboat fund as it looks for ways to unlock billions of pounds of retirement fund capital to boost economic growth.
Jeremy Hunt, chancellor, is expected to announce a consultation on a widened role for the Pension Protection Fund (PPF), in his Autumn Statement next week.
The move is expected to be part of a wider range of measures designed to encourage pension fund investment in so-called “productive finance” or areas that can help boost economic growth.
The £33bn PPF was established in 2005 to rescue defined benefit pension plans in the event of the sponsoring employer collapsing and to ensure members continue to receive retirement benefits.
Under Hunt’s proposals, the fund would take on an additional role as a consolidator of smaller DB schemes attached to healthy companies.
The PPF, which is partly funded through an industry levy, manages £33bn in assets and its size gives it more investment flexibility compared to many corporate DB schemes.
In a call for evidence earlier this year, the government said the expanded role of the PPF would “drive scale, enabling a more sophisticated and productive long-term investment approach”.
However, the proposals have sparked concerns that the broader remit for the PPF would create a state-backed competitor to insurers, which are targeting hundreds of billions of pounds of pension assets via buyouts of corporate schemes over the next decade.
Yvonne Braun, director of policy for long-term savings at the Association of British Insurers, said: “Such a move would be a market-shifting intervention in a buyout market that’s not only working, it’s thriving.”
“It’s well-regulated, well-funded, well-functioning and showing no evidence of market failure,” she said. “Any expansion would also risk introducing moral hazard into DB scheme decision-making.”
Braun said employers could feel inclined to put less money into their scheme to get cheaper protection from a public consolidator, rather than seeking full protection via an insurer buyout.
“Questions around who would pick up the bill if the PPF had to pay full benefits to members where schemes fall into deficit would also need to be answered. Would the government have the appetite to take on this liability?”
Nigel Peaple, director of policy and advocacy with the Pensions and Lifetime Savings Association, said beyond encouraging the buyout market the government would do better looking at other private sector solutions, such as putting commercial DB superfunds, which already act as consolidators, on a statutory basis. “We do not believe the government needs to set up a public sector consolidator,” he added.
One insurance executive said the emergence of a “state-sponsored” competitor could undermine insurers who had built business models predicated on a wave of corporate pension deals.
Another executive said any move that “blew up” the buyout market would put at risk previous pledges from insurers to invest £100bn in infrastructure and other long-term assets.
Hunt is also expected to unveil new tax incentives to encourage employers with well-funded DB schemes to continue running their retirement plans rather than paying an insurer to take over the liabilities.
This proposal aims to ease employer access to any pension scheme surplus and encourage corporate pension plans to back long-term investments to help boost the economy.