Ministers examine reshaping the pensions lifeboat funds to boost business

Ministers are looking at a radical reform of the fund protecting savers from company pension plans. This could transform it into an investment vehicle capable of investing tens or hundreds of millions of pounds in UK companies.

According to those briefed about the proposal, the Pension Protection Fund (PSF), which is backed by the government and has PS39bn of pension assets, could be given a broader mandate to tackle struggling “defined benefit” corporate retirement schemes.

The PPF currently has a limited role as a safety net to protect pension schemes in the event of an employer’s failure and inability to meet retirement payments promised by members.

Treasury proposals are being reviewed and would expand the PPF’s role to include taking over company pension plans which haven’t failed. This could unlock tens or even hundreds of millions of pounds in investment for the UK.

Jeremy Hunt is examining these proposals to see if they can be used to direct more pension funds held in defined benefit schemes towards start-ups, fast-growing companies, and stop the decline of the City of London as a venue for Initial Public Offerings by companies.

The people briefed about the proposals stated that there would not be any compulsion. However, smaller defined benefit schemes with poorer performance could request to be taken over the PPF.

This would enable them to take advantage of scale, improved governance, and investment expertise rather than wait until they end up in the PPF after failing. One government insider said that the proposals are still in an early stage and would require primary legislation.

Around 5,100 defined benefit pension schemes are available in the UK’s private sector, and they have assets worth around PS1.4tn.

According to PPF’s analysis, the recent rise in interest rates has increased funding for most schemes. However, a significant minority are still at a deficit.

Steve Webb is a former minister, and a partner at LCP, a consultancy that provides actuarial services. He said if pension schemes in trouble could be transferred to the PPF, without first failing, “tens” of billions could be transferred to the fund.

He added that a transfer like this would be possible with the UK defined benefits space which has more than $1 trillion in assets.

Webb, however, said that the PPF makes its own investment decisions even though it’s a statutory corporation accountable to Parliament.

He added that “if the government wanted to implement a direct investment strategy it would need to change the PPF rules to achieve this.”

The government is looking at several options to make sure that the tens and billions of pounds invested in pensions go to UK companies to boost them, as well as to help with the transition towards a greener economy.

According to Ondra Partners, the data shows that over the last two decades, British pension funds and insurance companies have reduced their holdings in UK-listed firms from half to just 4% of their portfolios. Their fixed income holdings have risen from 17 percent in 2000 to 72 percent in 2022.

The accounting changes in 2000, which forced companies to report pension fund deficits and surpluses in their balance sheets, were a major factor in this shift in asset allocation.

A government spokesperson said: “We are determined to increase investments into the UK’s high-growth industries, to ensure our most innovative businesses can access the financing they need to scale-up and list in the UK.

The key is to unlock the billions in pension funds across the UK. This will allow the capital to be channeled into productive assets that benefit both pensioners and businesses, thereby boosting economic growth and increasing retirement income for millions of savers.

PPF was contacted for comments

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