PPF as a consolidator: the pros and cons

As part of its consultation on options for DB schemes, which include proposed new powers for trustees to free up surpluses, the government also wants to explore how to open up the PPF to consolidate small schemes.

The PPF has expressed confidence in its ability to provide strong administration, delivery and investment services as a consolidator, should it be given the green light.

However, others have voiced concern about whether the plan would have the intended impacts of improving member outcomes and increasing investment in UK productive finance. Some have urged the government to put strict limits on the PPF’s consolidation remit to ensure that it does not disrupt existing options for DB schemes such as insurance or commercial consolidators.

Calum Cooper, head of pension policy innovation at Hymans Robertson, said the government had to address what would happen to member benefits if the public consolidator failed – including whether pension payments would be reduced.

He added: “A public sector consolidator must not be a way to nationalise DB by the back door. That wouldn’t be in stakeholders’ best interests, as any indication that this could be the likely outcome would be expected to deter new commercial entrants or lead to commercial capital taking flight. In doing so it would exacerbate the very problem around commercial capacity that the government believes a public sector consolidator could help solve.”

Small schemes focus

In its response to the government’s consultation, the Pensions Management Institute (PMI) said that if the PPF was only open to schemes not already served by existing consolidation options such as commercial operators or insurers, then it may not reach a material scale.

This could hamper its ability to have a material impact on investment in UK productive finance, one of the key reasons for introducing a new consolidator.

LCP expressed support for the public consolidator concept, saying that the PPF could have a crucial role in future of DB schemes. However, it said its role needed to “play to the PPF’s strengths” and fill gaps not currently met by existing options.

A consolidator focused on small schemes, such as those below £10m, could have a “stabilising role to play” in the pensions landscape, LCP said, as it could provide sub-scale schemes with improved governance and investment services. It also proposed a “gateway test” for larger schemes to enter “designed to mitigate the risk of unfair competition with superfunds or insurance buyout”.

In its response, TPT Retirement Solutions said a public consolidator focused on the smaller end of the market would help those that “are not of interest to the commercial providers and are weighed down by disproportionately high advisory fees”.

Sarah Elwine, actuarial director at Broadstone, said: "The idea of a public sector consolidator… has the additional benefits of increasing levels of investment in high-growth UK assets, a flagship government policy, and we recommend that careful thought is given to minimising potential market distortions, augmenting rather than disrupting the options available to trustees.

“Any consolidator will have to carefully balance the potential conflicts between these objectives and guaranteeing member security, which must remain the priority. It should also be noted that the landscape could change markedly between now and the mooted market entrance of a consolidator in late 2026.”

Protecting competition

The PMI also questioned the wisdom of using existing PPF assets or taxpayer money to underwrite a consolidation vehicle.

“If trustees/sponsors conclude that a public sector consolidator is effectively fully underwritten by the government, the perceived additional security represents an anti-competitive environment compared to commercial options,” the institute added.

Any publicly-backed consolidator should have strict limits on eligibility, it argued, and any plans to enable standardisation of benefits should be extended to all commercial consolidators so as not to affect the competitiveness of this nascent market.

The Society of Pension Professionals (SPP) also urged the government not to disrupt the insurance or superfund markets through its creation of a public consolidator.

Instead, the government should ensure terms “are consistent with commercial superfunds”, the SPP said.

LCP partner Jonathan Camfield said: “For the smallest schemes, a public sector consolidator could improve outcomes, but its place in the market will need to be carefully judged to reduce the risk of unfair competition with other options already available to schemes.”

David Lane, chief executive at TPT Retirement Solutions, supported the idea of benefit standardisation, which he said could “drive innovation in the consolidation market and allow many more commercial options to proliferate”.

However, he added, if a public consolidator could standardise benefits but this was not extended to commercial operators, it “would present an unfair advantage”.