PPF Strategic Plan: an observation for private market investment managers

The PPF released it's 3-year strategic plan today.

The statement that caught my eye was

"In the future we expect there to be fewer claims from schemes on the PPF than today, and therefore the levy we need to collect will be small in comparison to our own assets and liabilities. Our current projection is that this point will be be reached in 2030."

Might the timeframe for a decline in total risk-based levies paid to the PPF tell us something about the pace at which the c. £1.5trn corporate DB pension fund industry will pivot away from equity and towards mezzanine and senior debt?


1. The PPF think that DB pension funds reach a tipping point in 2030 where the PPF will not be collecting nearly the same amount of levies as it does today.

2. The majority of levies collected is from schemes with a buy-out deficit. Fully-funded schemes pay a trivial amount in levies.

• Schemes in deficit on a buy-out basis pay a levy of approximately 10 basis points of that buy-out deficit.
• Schemes that are fully funded on a buy-out basis pay a levy of approximately 1/10 of one basis point of their total buy-out liabilities.

3. The PPF's suggestion of a tipping point in 2030 therefore seems to suggest that they are planning for a world where a significant number of schemes are fully funded on a buy-out basis by 2030.

• Of course a best-case scenario for financial soundness of DB pension funds corresponds to a worst-case scenario for future levy income for the PPF and so perhaps the PPF is being overly cautious in its planning.

4. If, however, this scenario were to come to pass, it may have implications for asset managers and the types of products that they will need to develop, as well as for the sources of capital available to fund unlisted investments such as infrastructure.

• For example, much is made of the institutional investor trend toward private market assets. Under the sort of scenario outlined by the PPF, DB pension funds invested in private markets are increasingly likely, over time, to switch their private market exposure away from equity and towards mezzanine and senior debt.

• In the run-up to achieving fully-funded status, equity and mezzanine debt (with its higher returns) could feature more heavily as funds seek to close funding gaps. As fully funded status is reached, senior, secured debt with lower, but more stable returns, may well dominate.

• Now you could say we have always know this but the scenario outlined by the PPF may allow us to place a timeline on this. 

• Private market equity (infra, real estate and corporate) will continue to be gradually squeezed out of DB fund allocations over the next 11 years (2019-2030) as funding levels improve and reduce the need for growth assets.

• In the 1st half of the next decade (2020-205), pension funds may close their funding deficits by continuing to allocate to private market equity.

• Gradually, as funding levels improve, mezzanine and junior tranches may see higher demand and benefit from early flows away from equity. This may happen if mezz debt is  perceived to offer favourable returns to allow (smaller) funding gaps to be closed but at lower volatility compared to investments in equity.   

• As funding levels improve further still, senior debt may gain favour 

• The pace at which this all happens will clearly depend on how well funded pension funds actually become over the next decade. 

• One could say that private market equity may well become a  a victim of its own success by allowing better funded pension plans to more quickly reverse out of equity and into mezzanine and senior debt. 

5. For asset managers raising private market funds in the next few years, equity funds will remain attractive but increasingly these managers may wish to consider diversifying their product mix to offer capabilities and funds that invest in other parts of the capital structure, including mezzanine and senior debt.

6. Private market investment managers with strong credentials in equity investment should be ideally placed to understand the risks of investing in mezzanine debt and hold a competitive edge over those asset managers with more experience in managing debt. That competitive advantage may erode with time.