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The UK’s £32bn pensions lifeboat has said it will invest 10 per cent of its assets in British infrastructure and scale-up companies if the government expands its remit to allow it to hoover up smaller schemes.
The Pension Protection Fund — which was set up 20 years ago to protect defined benefit scheme members of failed companies — wants to be allowed to consolidate the UK’s sprawling DB sector, but needs ministerial approval to expand.
“We’ve committed that we think we can get 10 per cent of its assets into UK productive finance, which is the juicy stuff the government wants if we ran a public sector consolidator operating at scale,” PPF chief executive Michelle Ostermann told the Financial Times.
The PPF currently has £2.5bn in British infrastructure and scale-up businesses, including the Thames Tideway sewer, property regeneration company Harworth Group, and Peel Ports, the second-largest port company in the UK.
Ostermann said the amount could rise from 7.5 per cent of the fund to 10 per cent if the scheme was allowed to expand to increase its financial firepower.
The previous Conservative government last year explored turning the fund into a consolidator in a consultation that estimated that rolling up all DB schemes with under 100 members would create a fund with about £10bn in assets.
For schemes with a weak covenant group — meaning the corporate sponsor’s ability to pay pensions appears vulnerable — this rose to 800 schemes with £80bn in total assets. The UK has about 5,000 private sector DB schemes serving 9mn members. Those with fewer than 1,000 members make up 80 per cent of the total number of schemes.
“We are looking forward to expanding both domestically and internationally,” Ostermann said, adding that the drive to consolidation would “give better outcomes to members”.
Chancellor Rachel Reeves wants UK pensions to invest more domestically in order to help fund infrastructure projects and kick-start the nation’s stuttering economy.
The government told the FT it would set out further details regarding the public sector consolidator in its response to the consultation “this spring”.
Ostermann, who comes from Canada, where she has held senior positions at a range of pension companies, said the PPF was the closest thing the UK had to the “Maple 8” model — a system admired by the UK government for having large investment teams focused on infrastructure and private equity investments.
“We can do this stuff ourselves in-house . . . we do it through co-investments and are starting to do it through direct investing,” she said, adding that enables the PPF to strip out fees and improve returns.
About a third of the PPF’s £32bn has come from investment performance, according to its latest annual report, and around a third from schemes rolled into the fund. Some 23 per cent has come from levies companies have to pay to the fund and a further 11 per cent from recovery from insolvency proceedings.
The fund is in discussions with lawmakers about increasing the benefits it pays to its 300,000 scheme members — including former staff at BHS and Carillion — after an increase in its ability to meet its obligations.
Currently the scheme does not inflation-link any benefits accrued before 1997 for the pensions it pays. People below the retirement age when a scheme enters the PPF usually receive 90 per cent of their benefits owed.
Half of the fund’s assets are in a liability “matched” fund and cover its existing pension obligations. The other half are in its growth portfolio that Osterman views as an insurance policy against future underfunded schemes the fund might have to take on.
Kate Jones, chair of the PPF, said now was the time to “revisit the compensation levels paid” as the fund was in a “financially different position” than it was when it was set up 20 years ago, but she added it was never intended to provide full benefits.
