Private defined benefit pension plans sound great. But what happens if your employer, or former employer, goes bankrupt? If they keep enough assets and invest them wisely, perhaps the pension fund will fulfill its promise to you? For others, there are pension protection funds.
The PPF was established in 2005 as a backstop for the approximately 9 million UK private sector defined benefit pension fund members. If you’ve worked for Woolworths, Kodak, BHS or any of the 2,000 or so other defunct companies, you’ll be one of around 300,000 PPF members.
Michelle Osterman has been CEO of PPF since April 2024.
The transcript has been edited for clarity and brevity.
How did you get your pension?
I spent 18 years working for three of Canada’s largest insurance companies, doing the investment business, the investment side of the insurance company, and I fell in love with that work and ended up doing more DC and DB pension work. So. I worked in pensions for an insurance company and fell in love with it.
The prime minister has spent much of his time publicly praising Canada’s system. What do you think is right about Canada?
What distinguishes it from other major pension systems around the world is its governance model and its size.
It has a public DNA, but it also has commercial capabilities. And that’s a difficult balance to strike. (But) this allowed us to manage our capital very patiently. Although we are very long-term focused, we can also make very large investment decisions very quickly.
And this scale has allowed major pension plans in Canada, as well as other countries, to build sophisticated capabilities to shoulder the cost of internal investment management, particularly in the personal wealth portion of the market.
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So do you think PPF is a British Canadian agency?
It’s interesting so you should give it a listen. I didn’t know much about PPF when I was approached to potentially take on this role. It turns out this is really a mini version of the Canadian model.
We have very sophisticated investment capabilities leveraging personal assets and collective investments. We have the management ability to handle approximately 500,000 members and a track record of extremely high customer satisfaction. We also have the actuarial and fiduciary capabilities for financing, valuation, pricing, and all the risk protection needed to be the backstop for the entire DB industry.
It is truly remarkable that the Canadian system was born in the midst of a major financial crisis. The government spends nearly 10% of GDP each year on debt servicing, three times the current level in the UK and US. It seems like people went around the country intentionally trying to build consensus. . .
Confidence. It was a conviction, not an agreement. It is an absolute belief from our ancestors. And for some of them, it was a labor of love. Not only were they politically aligned, but they were also financiers. And it transcended political parties.
No regrets. It is now generating wealth at a rate that means our social programs are better funded, with $1 trillion soon to be invested in our CPP, and the required cost of it is $20 billion each year.
And look where we are now. It has quadrupled. And 75% of almost every pound you take home in retirement doesn’t come from contributions. It came from taking risks. We thought it would work in Canada as well.
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Do you see any prospects of this kind of pensions revolution coming to the UK any time soon?
Depends on the government. I think the will is here and the understanding is here. The people I talk to are almost as passionate about this issue as I am. It turns out that it is possible. I can see the Netherlands, I can see Australia. It worked elsewhere as well. But courage and money are the difficult parts for them at the moment. We just started donating to people who don’t have the funds.
I believe that their vision to expand on what we already have will pay off very quickly and will not require new funding. But I think that requires a similar kind of belief that they had in Canada 25 years ago.
What is missing from the pension debate?
There is a strong appetite for growth in the UK. What we are missing from that conversation is the need to create wealth for consumers, pensioners, which in turn creates growth for the economy. I don’t think that has been discussed enough.
If you’re trying to maximize an individual’s wealth, you’ll want to be able to convert their savings into the greatest future income potential. And when you line up all the different tax benefits and investment structures, you’ll find that a large joint annuity professionally managed by a non-profit foundation like Canada’s is the most efficient way to generate lifetime income.
I know in this country we focus on saving money, and that’s great. However, there is a difference between saving and investing. And the importance of investing means being ready to take some risk.
We talk about how we have de-risked pensions over the past 20 years or so, particularly with DB pensions. We weren’t really mitigating their risk. I would argue that we are de-equitizing them.
And when we removed that asset, we actually created new risks. It is their own longevity risk and their ability to generate sufficient lifetime income.
Therefore, the current DC form of annuity is not technically an annuity. They are savings vehicles. That’s why we call them pots.
Can’t contribute to the problem. These donations are finite, so you should treat them as valuable and squeeze as much as possible into future income.
Are there any lessons from Canada that you think the UK should skip?
That’s a difficult question to answer. Because each country thinks about different things.
Canada’s system has faced scaling challenges over the past two decades. But now, cash flow is starting to turn from significantly positive to significantly positive or even negative. Therefore, that environment requires us to work and invest differently.
For 20 years, it aimed to quickly deploy capital and build a large private asset team to be able to get it into the ground and originate. Now, these teams have realized that they may need to scale up over a certain period of time. And while they may not always be creating, they are turning their attention to asset management, or creating value from those assets.
And even more important is the exit. I’m thinking of a way to end this a lot. It’s the same kind of hangover that’s stuck in the private equity industry lately. Big Canadians who play both GP and LP are experiencing it as well.
Should the PPF utilize debt in the same way as some Canadian funds?
Large (government-backed) asset owners now have the ability to issue bonds. And they have almost the same credit rating as the sovereign. As a result, large Canadian schemes are typically rated close to or equivalent to AAA and have very low costs of debt.
I am aware that the issuance of bonds by PPF is prohibited by law. But I don’t see why they wouldn’t do it if they could (if regulations allow). If the issue finances separate debt, I think it will probably be well received in the bond market.
PPF is not guaranteed by the government, but most people think that the Treasury stands behind it.
Yes, the intention was to stand on its own as a backstop mechanism for the entire corporate DB pension scheme. That’s why, 20 years ago, we had to invent a calculation to calculate the appropriate levy to build up enough reserves to backstop 7,500 schemes, worth £1.5 trillion at the time.
and (these schemes as a whole) were severely underfunded and had high covenant risk. Some said it was difficult or impossible. However, if the bill is approved, we will soon have permission to suspend the collection of these levies. It is now self-funded.
According to its latest annual report, the PPF is nearly 180% funded with an actuarial surplus of £14bn. Do you think this means that the levy has historically been too high?
No, it’s not. I feel very strongly about this statement because I think it misunderstands our funding position. If you don’t mind, I’ll explain a little bit how it works.
PPF actually serves two main roles. One is to backstop the entire industry and collect a levy to do so. And you need to have enough reserves so that you can get by on plans that may run out of money in the future.
I mean, we’re both pension managers of failed schemes, we’ve done it about 2,000 times, and we have about half our balance sheets to back it up with LDI strategies. And the other half of the assets are sitting in reserves to back up the rest of the industry, which remains in more than £1tn and more than 5,000 schemes.
People often think of the pension surplus as a percentage of total assets divided by the size of the pension liability.
But these are reserves for future unpaid claims of the 9 million members in the remaining 5,000 schemes. Therefore, although these reserves are often referred to as retained earnings, this is generally not the case.
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The government discussed turning the PPF into a public sector pension integration agency. Where are we in this process?
There are some very important measures related to PPF that will be implemented as part of the Pensions Bill. Consideration of the levy and potential indexation has been a hot topic.
And we’ve pushed into the future the possibility that we can do more than that.
Some of the conversations I’ve had with the industry about potential integrators are starting to take shape very well. We’ve seen quite a bit of feedback on this from several industries. So I see a lot of doors opening.
What do you think about the mandate, perhaps the most controversial part of the pension bill?
We’re DBs, so this doesn’t directly concern us. The indicators prescribed there are relatively intuitive to me.
Half of our balance sheet is in the UK. We already have about half of our growth portfolio invested in private assets. And when we invest in personal assets, there’s a fair amount of investment in the UK, including stocks. So we’re not just dealing with infrastructure debt, we’re also dealing with infrastructure capital. In addition to private debt, we also do private equity. Although we don’t play much in the VC space.
If you weren’t interested in finance or pensions, what do you think you would have done instead?
It may sound a little contrived, but I’m still going to do something with math. I’ve always loved math, and my intention was to do something non-commercial, and I ended up getting there. That’s why it feels good. If not, something sporty. I love track and field growing up. I miss that.
