The Pension Protection Fund's surplus has the power to significantly alter the fortunes of the UK's defined benefit members and employers, writes Society of Pension Professionals president Paul McGlone, but deciding when, how and to whom to distribute it will prove an intriguing challenge.
That shouldn't be too surprising. After all, the PPF has always aimed to have more assets than it needs to pay its members and it was only a matter of time until it was in this position.
Any distribution of surplus could have a big impact on either group
The more interesting issue is what it could do with that surplus, and when.
Returning it to the government in some way is clearly something to avoid. It would effectively be taxation and would have the industry up in arms.
Pay members or employers?
Using it for the benefit of members is absolutely worth considering – after all they are the ones who have lost out. But choosing which members is hard.
Current pensioners and future retirees already in the PPF could be given an uplift in benefit, but is that permanent, or temporary, while surplus remains? What about those members who have already had pensions paid at reduced rates and future members yet to enter the PPF?
Giving benefits to schemes and sponsors is clearly also possible, but again, which schemes, and how? It could easily be reductions for those still paying the levy – that is straightforward, and by definition they are the schemes that have not claimed.
Refunds for those who were paying at the time is harder. Although they gave rise to the surplus, some of them no longer exist.
Wherever the surplus goes, the impact could be substantial. Very roughly, a £1bn surplus could be enough to provide an uplift in pension pots for all current PPF members of about 3 per cent.
Alternatively, it could lead to around 20 per cent lower levies for the next 10 years.
Time to start is now
However, with a PPF funding level of more than 120 per cent, the surplus could potentially be much more – perhaps more like £5bn.
That could be enough to restore pensions to close to 100 per cent, or wipe out levies for the next 10 years, or some combination of the two.
These figures are indeed very rough, but they show that any distribution of surplus could have a big impact on either group.
It would be a shame to wait longer than necessary to do this. Every year that goes by is another year that members and schemes are not seeing the benefit of the surplus.
Clearly the PPF also needs to be cautious. It cannot release reserves too early and risk it being the wrong decision, but at the same time they have already piqued the interest of the industry, and so they should not wait too long before making it a reality.
Paul McGlone is president of the Society of Pension Professionals and a partner at Aon
