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Public consolidator would be a major and unjustified intervention, warns ABI

As part of its response to a Department for Work and Pensions (DWP) consultation on changes to Defined Benefit (DB) pension schemes, the Association of British Insurers (ABI) has said a public consolidator must not undermine a competitive and thriving buyout market, which caters to schemes of all sizes.

Following on from its call for evidence last year, DWP has sought views on the introduction of a public sector consolidator operated by the Pension Protection Fund. It is also exploring making surplus extraction easier for well-funded DB schemes.

On the role of a public consolidator, we have stressed that the market is thriving and questioned why taxpayers should have to underwrite or take on the risk of private sector DB schemes. On surplus extraction, we have highlighted the need for great caution and warned the proposals run the risk of negative consequences for scheme members and disappointing the Government’s productive finance aspirations.

A public consolidator must not undermine the competitive and thriving commercial market

Introducing a public sector consolidator, operated by the Pension Protection Fund, would be a major and unjustified intervention in a well-functioning and competitive market which caters to schemes of all sizes.

Over 80% of schemes are now in surplus and will be able to access commercial options either now or in the future. Our data shows that bulk annuity sales by insurers are accelerating. They reached a record £49.3 billion last year, with insurers securing the retirements of 407,000 people - nearly three times as many people as in 2022. This includes small schemes which are well served by several insurers who operate at this end of the market. The majority of buy-out transactions last year were for schemes smaller than £100 million.

Any move to a public consolidator risks undermining this market. It also risks shifting the responsibility for making pension payments from private sector employers to the taxpayer, potentially letting employers off the hook from meeting their long-standing pension promises.

If a public consolidator was introduced, a rigorous and robust framework must be put in place to ensure it could only take on schemes which are not commercially viable. This means only underfunded schemes without a strong employer covenant should be eligible to enter. Even then, we agree with the government’s proposals that employers should keep their obligation to scheme members and continue to make contributions to the scheme.

Yvonne Braun, Director of Long-Term Savings at the Association of British Insurers, said:

“The UK pension insurance sector provides guaranteed, life-long pension payments to scheme members which fully reflect the promises made by their employers. This competitive and thriving sector is also critical for the government to meet its productive investment goals, as insurers invest in highly productive assets across the economy.

“While the intention for a public consolidator is to target only pension schemes which are not commercially viable, this is only a small minority* of schemes. These underfunded schemes without a strong employer covenant should be the target market for a public sector consolidator to ensure that the pension insurance market is not undermined. Even then, great care would be needed to guard against wider scope creep and letting employers with well-funded schemes off the hook from meeting their long-standing pension promises.”

The interests of members must be put first in surplus extraction debate

We’ve consistently said that extreme caution should be exercised in DB reforms, including the use of any surplus. It has only been in the past few years that these schemes have more assets than they need to pay members their pensions – creating a surplus. This could very well change in the future, and savers’ retirement incomes must not be put into jeopardy.

The central purpose of DB pension schemes – to pay the benefits promised to members – must be protected. But the government’s proposal does not require members’ benefits to have been fully secured before surplus is extracted. So, if a surplus were to be extracted and the scheme then faced a deficit or the bankruptcy of the employer, members could lose out on their full benefits.

Hetty Hughes, Manager of Long-Term Savings at the Association of British Insurers, said:

“Returning the scheme surplus to employers before benefits have been secured should be treated with utmost caution. We must remember the core purpose of a DB pension: to deliver the life-long pension payments promised by the employer. This means very prudent thresholds should be put in place before a surplus can be returned to sponsors. This includes only extracting money above a funding threshold which would enable the scheme to secure its members’ benefits through insurance, as well as having a prudent underlying investment strategy.”

Relaxing surplus rules could disappoint hopes for productive finance boost

The government believes that relaxing the rules on surplus extraction may encourage pension schemes to back more long-term investment into private assets, delivering a boost to the economy. However, the absence of rules around how employers may use the surplus means that this hope may be gravely disappointed. For example, employers could use these additional funds for share buy-backs and dividends, rather than productive investment, or reinvesting the money back into the business or paying more contributions into employees’ defined contribution schemes.

Extracting surpluses would also mean that trustees would have less capital to invest and could lead to them being more risk averse when setting investment strategies, further hindering the government’s productive finance agenda.


Last updated 23/04/2024