1. Introduction
Our consultation
On 29 April 2021 TPR and the PPF issued a joint-consultation ‘Proposals to update the asset information collected from defined benefit pension schemes.’ The consultation sought views from the pensions industry on suggested adjustments to the asset information collected from schemes. The changes aimed to better capture data on investment risk without resulting in an excessive administrative burden on schemes. The consultation closed on 10 June 2021.
Proposals were based on categorising schemes by liabilities into a tiered structure (Table 1). The proposals retain a simple reporting approach for smaller schemes (Tier 1), with more granular information on asset allocations captured from schemes in Tier 2, and the largest schemes (Tier 3) providing information on the sensitivity of portfolios to investment stresses. Proposed changes included collecting more detailed information on bonds, and the introduction of three new categories: absolute return funds, diversified growth funds and private debt.
The consultation also set out the PPF’s proposals for keeping a simplified approach for the roll-forward methodology used in PPF levy calculations.
Summary of responses
The consultation received 29 responses. 17 respondents used our quick response form, while 12 respondents used our full consultation response form. We received responses from advisers, trustees, schemes and representative groups.
There was wide support for the case for revising and updating the asset class information collected, and the need to collect more detailed information on bonds. A key area of comment was on the appropriate point at which to require more granular information from schemes. While a majority of responses supported our proposal for a £20m Tier 1 to 2 boundary, some respondents argued for a higher threshold either permanently or for an initial period. With regards to PPF roll-forward indices there was wide support for keeping the simplified approach although some respondents expressed an interest in using some of the more detailed bond indices.
After reviewing and discussing the responses, we intend to:
- implement in 2023 the introduction of the new asset class categories proposed in the consultation;
- as proposed, use a tiered approach to collect asset information, based on scheme size using s179 liabilities;
- reflect the feedback received during consultation by setting the Tier 1 to 2 boundary at £30m with the intention to keep it under review and reduce the threshold to £20m (or less) in the future;
- set the boundary for Tier 2 to 3 at £1.5billion;
- continue to use the simplified roll-forward system for the new asset categories, with a plan to review the granularity of the representative indices in future.
Table 1: The asset class information by Tier
| Tier 1 (Simplified) - Less than £30m | Tier 2 (Standard) - £30m to less than £1.5bn | Tier 3 (Enhanced) - £1.5bn or more | |
|---|---|---|---|
| Bonds | Tier 2 plus risk factor stresses
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Fixed interest
Inflation linked
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Fixed interest
Inflation linked
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| Equities | |||
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| Other | |||
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* UK Government inflation linked bonds will be categorised separately, with other inflation linked bonds being allocated to their corresponding fixed interest sub-class. ** ABCs are deducted from asset allocations before rollforward and therefore do not have a rollforward index or a stress factor. |
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Next steps
TPR is developing the necessary changes to their scheme portal to enable implementation of the new scheme return. This will, in due course, include the collection of the new asset data. The intention is to implement the collection of the new asset information in 2023.
TPR has the ability to collect data which we believe to be relevant to the exercise of the functions of the PPF. In addition, the Pension Schemes Act 2021 introduced new requirements for trustees in respect of their long-term investment plans. The provisions are not yet in force and further detail will be fleshed out in forthcoming regulations. However, the changes herald a greater focus for trustees and TPR on investment risk and planning. The new scheme information will facilitate a more accurate assessment of schemes’ investment risk, which will support TPR’s ability to use its resources appropriately.
The PPF will consult on the rule changes necessary to facilitate the use of the new asset information in the levy. We expect this to form part of the 2023/24 levy consultation process.
2. Market developments
Consultation questions
We asked the following questions:
- Do you agree that bonds will continue to be a focus for pension plans?
- Are there other market developments we need to consider?
Analysis of responses and comments received
There was agreement that bonds will continue to be a focus for pension plans.
Respondents noted that bonds provide hedging for liabilities and, as schemes mature, this may drive further increases in bond exposure.
We agree that the use of bonds is likely to continue to increase. When the changes proposed in the consultation are implemented, we will be able to better capture the risks associated with bond allocations.
Some mentioned an increase in high yield bonds, which makes the changes we will implement all the more important, as this increases the diversity of risk levels within bond portfolios.
Liability driven investment (LDI) use has continued to increase and there was some concern that the impact of this change is not caught by the data collection in the lower tiers. There was also concern that the current guidance on how to report LDI assets lacks clarity. Schemes are allowed to ‘trade up’ to Tier 3 if they wish to allow for LDI and / or other derivative strategies that are not captured adequately by a simple percentage allocation. They can also show a positive exposure to bonds and a negative cash exposure where this reflects the holdings within the LDI portfolio.
Other market developments that respondents mentioned were:
- more appetite for infrastructure investment;
- more overseas investment;
- continued appetite for schemes to investigate buy-ins and other risk transfer solutions, with one respondent suggesting that longevity swaps should also be taken account of;
- increasing use of synthetic hedging strategies and repos;
- increasing consideration of Environmental, Social and Governance (ESG) issues; and
- use of gilts for collateral as well as to hedge interest rates and inflation.
TPR plans to refresh its guidance on completing the scheme return, including the allocation of LDI and will consider these comments as part of that review.
Other market developments
In addition, we note that last month The Productive Finance Working Group published a series of recommendations aimed at enabling better access to, and greater investment in, longer-term, less liquid assets. While this was not a specific part of our consultation, in considering the responses we received we have reviewed the categorisation of investment in infrastructure and similar types of assets. At this time, we do not consider further changes are needed in the context of the report; however, we will continue to monitor developments in schemes’ investments to this broad class.
3. Detailed proposals on asset class information
Our main consultation proposals:
Bonds
- Introducing a specific UK Government fixed interest bond category to replace the more general Government bond category that currently exists for all tiers.
- Introducing a specific UK Government inflation-linked bond category to replace the more general inflation-linked category that currently exists for all tiers.
- For bond investments, introducing additional categories to identify differences in maturity, credit quality and currency for Tiers 2 and 3.
- Adding a sub-investment grade bond category for all tiers.
- Adding a private debt category for Tiers 2 and 3.
- To continue to expect multi-asset credit funds to be split into their constituent parts
Equities and other assets
- Further breaking down overseas equities into developed and emerging markets for Tiers 2 and 3.
- Removing the hedge fund category for all tiers.
- Adding a diversified growth fund (DGF) category for all tiers.
- Adding an absolute return fund category for Tiers 2 and 3.
- Removing the commodities category for all tiers.
- Removing the insurance fund category for all tiers.
General comments
The overwhelming majority of respondents agreed with our proposals to include a lower tier to reduce the burden on smaller schemes. Of those that disagreed with the proposals, some felt that it was still overly burdening smaller schemes and others felt that even the smaller schemes should be providing more information.
There was broad support for the proposal to distinguish bond investments by reference to credit quality, maturity, and currency. In particular, the proposal that only UK issuance should be included in government bonds, given its hedging characteristics, was supported by 10 out of 12 of those responding on this point (with only one opposing it). There were few comments on the boundaries proposed for maturity, reflecting that these are industry standard. Two-thirds of those responding to the proposal to break down multi-asset credit funds into their constituent parts were supportive.
Three-quarters responding agreed with our proposal to remove the hedge fund category. Over 80% of those answering the question agreed with the proposals to add absolute return funds to returns in Tier 2 and above and to include DGFs in all tiers. There was also over 80% agreement with the proposal to split overseas equities between developed and emerging market equities. All respondents answering the questions agreed with removing the insurance and commodity categories.
Bonds – consultation questions
We asked the following questions:
- Do you agree with our proposals for new bond categories under Tier 1?
- Do you agree with our proposals for more granular detail under Tier 2?
- Do you agree that private debt should be included for Tiers 2 and 3?
- If so, do you agree that a single sub-asset class is appropriate?
- Do you agree with our proposal for having a dedicated category for UK Government inflation-linked bonds given the implications for US Treasury Inflation-Protected Securities (TIPS)?
Analysis of responses, deliberations and conclusions
General comments
Although we note the arguments made that requiring more information on investments may be onerous for some schemes, TPR considers it reasonable that trustees of pension schemes should have an understanding of the nature of the investments the scheme holds and the risks associated with them. We set out in section 4 how we have taken account of feedback on challenges for smaller schemes in the design of our tiered approach to the level of detail required from schemes. Overall, we expect the new information requirements will keep the burdens on the smallest schemes low and improve the assessment of risk for larger schemes.
Government inflation-linked bonds
The proposal to limit the inflation-linked bond category to UK inflation-linked Government bonds was broadly accepted. The majority of respondents accepted the pragmatic approach of including US TIPS, for example, within non-Government fixed interest bonds (including overseas Government bonds). Some respondents felt that overseas Government bonds should be considered the same as non-Government fixed interest bonds (including overseas Government bonds (whether inflation-linked or not) where they are currency-hedged. As there are different yield curves and real yield curves in overseas markets, we do not consider the risks to be the same on overseas Government bonds as UK Government bonds, even where they are hedged back into sterling.
Others did not go this far but suggested that including US TIPS within non-UK Government fixed interest (including overseas Government) bonds resulted in an overstatement of the risk level of these assets. We recognise that this is the case but have settled on this allocation due to the need to keep the number of splits between different asset classes manageable. We were pleased that this pragmatism was widely accepted by respondents.
Private debt
The vast majority of respondents agreed that a private debt category should be included in Tiers 2 and 3. Some respondents thought that private debt should be further split between investment grade and sub-investment grade. While we don’t have any specific data, our understanding is that the current allocations to private debt are too small to merit splitting between investment grade and sub-investment grade at this stage. Additionally, we also received some feedback suggesting that a private debt category was not necessary. On balance, our proposals were generally supported, and we will, therefore, proceed with inclusion of a single private debt category for Tiers 2 and 3.
Bonds – Overall outcome
We are keeping our consultation proposals for bonds. But we reserve the right to split bonds assets out further in the future where the need arises and if, for example, the category increases materially in overall size of allocation or changes materially in its composition.
Equities – Consultation questions
We asked the following questions:
- Do you agree with our proposals for leaving the equity split unchanged for Tier 1?
- Do you agree with the proposal for Tier 2 to split overseas equities into developed and emerging markets?
Analysis of responses, deliberations and conclusions
Splitting overseas equities into developed and emerging markets
Most agreed with this proposal for Tier 2 and above, considering the risk characteristics of the two sub-asset classes to be different. Some respondents considered this split unworthwhile, given that the current PPF stresses are the same for the two sub-asset classes and that the allocation to equities has been falling for many years. We prefer to maintain the split, as we believe the information is easy to obtain and will be useful to support effective regulation of schemes. In addition, the risks are sufficiently different such that the stress factors may differ in the future.
We are retaining our consultation proposals for equities.
Other asset class categories and multi-asset credit funds changes – questions
We asked the following questions:
- Do you agree with including a category for DGFs for all tiers?
- Do you agree with our proposals to add absolute return strategies for Tier 2 and above?
- Given our proposals for DGFs and absolute return strategies, do you agree that the hedge fund category can be removed?
- Do you agree with our proposals to remove the commodities and insurance categories?
- Do you agree with our proposal for multi-asset credit funds to be broken down into the constituent parts for the scheme return?
Analysis of responses, deliberations and conclusions
DGFs
The majority of respondents agreed with having a separate category for DGFs for all tiers. However, there was also support for being able to split DGFs into their constituent parts and some observations that there is a wide variety of DGFs, meaning that it is not desirable to put all these funds into a single bucket.
We accept there is a wide variety of DGFs, but we do not wish to over-complicate the asset returns with a large number of inputs, particularly for smaller schemes. We also note that it will still be possible for schemes to allocate their DGFs by their constituent parts, even if they are reporting in Tier 1 or 2 or to move up to Tier 3 so they can incorporate the stress tests if they wish to better capture the risks from these investments.
Some respondents considered a single category for multi-asset strategies to be sufficient. We consider the risks inherent in absolute return funds to be different than those for DGFs. Most respondents supported the proposal of allocating DGFs to their own category.
Absolute return funds
The vast majority of respondents agreed with the proposal to split absolute return funds out as a separate category. However, as mentioned in the previous section, there were also those who felt that they should be allocated in the same category as DGFs (ie a general multi-asset fund category) and there were those who thought that they should be broken down further.
As noted above, we believe there is sufficient difference in the risk profile between DGFs and absolute return funds to warrant reporting allocations to these classes separately. The majority of respondents supported this view. Accordingly, we will adopt our consultation proposal to create a new class for absolute return funds.
Removal of hedge fund category
We proposed to remove the hedge fund category and that hedge fund allocations should be reported in “Other.” A large majority of respondents agreed with the proposal to remove the hedge fund category. Some thought that the new absolute return funds category should house all funds previously categorised as hedge funds, with others suggesting that it would be sensible to allocate hedge funds to the ’Other’ category, particularly given that this allocation will be small. Several respondents also commented that the categorisation of all types of multi-asset funds represents a challenge and that good guidance would be required to ensure appropriate allocations.
On reviewing the feedback received, we acknowledge that certain investments currently classified as hedge funds may be appropriately allocated to the new absolute return funds class for schemes in Tiers 2 or 3. We also consider that, in view of the diverse nature of hedge fund holdings, some may be most appropriately allocated to the 'other' category. We note that schemes falling into Tier 1 have the option to 'trade-up' to Tier 2 or 3 and thereby use the new absolute return fund class. We will provide guidance in due course to clarify the different treatments which may apply in particular circumstances.
Removal of commodities and insurance category
All respondents agreed with this proposal and very few respondents provided comments. It was recognised that these asset classes are small and that there was frequent confusion over the allocations to the insurance category. As a result, we are implementing our consultation proposals to remove the commodities and insurance categories.
Multi-Asset Credit (MAC) funds
Most respondents agreed with the proposal to continue to break down MAC funds into their constituent parts, recognising that it is difficult to treat multi-asset credit as a single, consistent group. There was some concern about the additional work involved in breaking these funds down, given the increased number of bond categories that will be in place, and it was noted that allocations within MAC funds may change markedly from year to year. We are implementing our proposal to allocate the constituent parts of MAC funds to the asset class categories included in the tier relevant to each scheme.
Other changes – question
We asked:
- Are there any other changes we should consider for asset class categories?
Analysis of responses, deliberations, and conclusions
Infrastructure / secure income
Several respondents suggested that we should include a separate category for infrastructure funds. A common argument put forward was that infrastructure is growing in appeal as an asset class, offering stable income streams with low levels of risk, sometimes backed by governments. There was recognition, however, that some infrastructure investments have similar levels of risk to private equity or, alternately, to private debt.
Our proposal did not distinguish infrastructure as a separate category and treated infrastructure assets no differently to other assets. As a result, we proposed that investments would be placed in one of a number of categories reflecting their nature.
The allocation to infrastructure investments is likely to be small for most schemes. We are treating infrastructure assets no differently to non-infrastructure assets. Where infrastructure investments are through bond vehicles that have a credit rating, they should either be placed in investment grade or sub-investment grade bonds depending on the credit rating. Where the investment is through private debt, or a private equity route, then this should be the basis for reporting.
We have observed the growth in this asset class and noted that income streams from infrastructure can be used within a cashflow-driven investment approach. However, we consider the distinction between private debt and private equity remains important, so it would not be appropriate to have a single infrastructure category. Additionally, we do not believe that infrastructure investment is currently a large enough asset class to warrant having a separate asset class for each of private infrastructure debt and private infrastructure equity. We will continue to monitor investment trends. For now, infrastructure assets will be allocated to the appropriate equity or debt category as appropriate.
LDI
Several respondents suggested the inclusion of a separate category for LDI or an improvement to the current guidance. We have noted the need for clearer guidance on how to allocate LDI assets and will take this forward when revising the guidance. We are also mindful that it is difficult to capture the risk profile of synthetic exposures within a percentage allocation approach even with the possibility of a negative cash allocation and positive bond allocation. Those that are keen to allow more accurately for their hedging can trade up to Tier 3.
4. Proposals on tier boundaries
Our main consultation proposals:
- Setting the boundary between Tier 1 and Tier 2 at £20m (based on s179 liabilities at the most recent valuation).
- Whether there is a need for a higher interim Tier 1 to 2 boundary and where that might be set.
- Setting the boundary between Tier 2 and Tier 3 at £1.5bn.
Measuring tier boundaries - question
We asked:
- Do you agree with our proposals to measure scheme size by submitted s179 liabilities?
Analysis of responses, deliberations, and conclusions
All respondents to this question agreed with the proposal to measure scheme size by submitted s179 liabilities as it is a straightforward approach and schemes have access to the information. The consultation also identified different measurement options and a few respondents highlighted the merits of using the alternative measures we had identified, without going so far as to argue we should move away from using s179. However, as we mention in the consultation we see the benefits in using s179 liabilities approach. We welcome wide acceptance of this proposal and confirm we plan to measure the tier boundaries using s179 liabilities.
Tier 1 to 2 boundary – questions
We asked the following questions:
- Do you support our proposal to allow schemes to voluntarily provide more asset information?
- Do you agree with the proposal to set the tier threshold at £20m?
- Do you believe there is a case for a higher initial threshold? If so, where should this be set?
- Could it become more difficult for schemes in Tier 1 to complete the standard asset return, if industry reporting moves to provide more granular information in Tier 2?
Analysis of responses and comments received and our response
Voluntarily providing more information
All respondents to this question agreed that schemes should be allowed to voluntarily provide more asset information. Responses to this question highlighted the benefits from a good governance perspective and of retaining the current approach. Due to the wide support for this proposal, we can confirm we are planning to allow voluntary submission of more asset information via higher tiers.
Setting Tier 1 to 2 boundary
As the consultation highlighted, TPR ideally would like all schemes to provide at least Tier 2 information; however, the provision of Tier 1 information is a simplification for small schemes, to reflect the challenges that they may have in providing this more detailed information.
We received 25 responses to the question “Do you agree that the Tier 1 boundary should be set at £20m?” Overall, a majority of respondents (56%) agreed with the proposals, though a sizeable minority preferred the boundary to be moved.
Among those arguing for a higher threshold, some thought for most schemes of £30m and £40m investment strategy is unlikely to be sophisticated enough to warrant the presentation of Tier 2 information. Some respondents raised concerns about the cost of filing information, asserting that schemes might feel they needed professional support.
Six out of ten respondents to the follow-up question considered there was merit in setting a higher initial threshold. The consultation also asked for stakeholder feedback on where to set any higher initial boundary for Tier 1/2. Figures between £30m and £50m were the most commonly mentioned by respondents. Some thought a 50% coverage of Tier 2 or above would be appropriate (about £30m), while one respondent thought £50m would align with the PPF Small Scheme Adjustment (SSA). However, if we were to align it with the SSA, there is a stronger case for a threshold of £20m since the aim of the policy is to protect schemes smaller than this from higher levies than their risk profile suggests, while a taper to £50m was introduced to avoid a cliff edge.
Fundamentally, TPR considers it reasonable that trustees of pension schemes should have an understanding of the nature of the investments the scheme holds, and the risks associated with them. In this context the level of disclosure proposed does not seem excessive for most schemes and will form an important component of the changes feeding into the new DB funding code.
We have reservations about the strength of the arguments for a higher threshold – relatively few respondents addressed the key issue of the trade-off between the potential for some cost and the improvement in understanding of investment risk. However, based on feedback and to give time for industry to build the necessary reporting requirements, TPR and the PPF are minded to set a higher initial boundary point. Accordingly, we will set the boundary at £30m initially, with the aim of lowering it to £20m (or less) at a later date. This is expected to mean that initially only a minority of schemes will need to provide more information, but in time most will. We are planning to keep this under review.
Exemptions for some schemes
Some respondents suggested providing exemptions or further easements to some schemes. Suggestions included excluding insured holdings when identifying into which Tier a scheme should fall, and including schemes that are closed to new members and accruals in Tier 1. In addition, one respondent suggested a Tier 0 for schemes who do not manage their own investments and are smaller than £1m on a s179 basis. PPF data indicates this would cover some 265 schemes.
Our view is that, ideally, all schemes would provide at least Tier 2 information, with Tier 1 information restricted to schemes for which providing it is too great a burden. Neither scheme status nor the presence of annuities renders the burden of providing information higher, so we rejected those suggestions, while recognising that small scheme regulatory costs are proportionately higher than for larger schemes.
Supporting schemes moving from Tier 1 to Tier 2
Some respondents expressed some concern about what happens to schemes when they move from Tier 1 to Tier 2. There were concerns about whether schemes would have sufficient notice to collect more detailed data and have sufficient information to fill in the scheme return correctly.
Both TPR and the PPF recognise that schemes moving from Tier 1 to Tier 2 need to have access to appropriate guidance and support. We aim to support schemes with clear guidance on completing the asset information for the scheme return.
We would expect the scheme actuary to advise the trustees if it is likely that the outcome of the s179 valuation would mean the scheme would move into a different tier. This advice could, in the vast majority of cases, be provided with sufficient notice to enable the scheme to obtain the required information and investment advice. It is the responsibility of the scheme’s trustees to ensure the scheme return is completed correctly, the correct tier is identified for the scheme and the corresponding asset information provided.
Tier 3 boundary - questions
We asked the following questions:
- Do you believe that there is a need for TPR to collect more detailed information on derivatives for a larger proportion of schemes?
- Do you agree that the boundary for Tier 3 should be £1.5 billion of s179 liabilities?
Analysis of responses and comments received and our response
Tier 3 boundary
Nine out of ten respondents to the question agreed that the boundary for Tier 3 should be £1.5 billion of s179 liabilities. Some observed that the boundary aligns with current PPF bespoke investment stress test.
One respondent asserted that scheme size is not a good proxy for the complexity and sophistication of investment portfolios, particularly for medium to larger pension schemes. They suggested identifying instead if schemes used derivatives directly to establish whether they should be in Tier 3.
We recognise that our tier proposal is based on scheme size and is, therefore, a deliberately straightforward approach. As we indicated in our consultation, we have concerns that trying to use investment complexity directly as a basis for allocating schemes to tiers could cause some smaller schemes difficulties in responding to questions designed to filter schemes and add unnecessary complexity to the approach. Therefore, we have decided to implement our consultation proposal and set the Tier 2 to 3 boundary at £1.5 billion of section 179 liabilities.
As part of this, the PPF will use the risk-factor stresses to inform the measurement of risk for PPF levy purposes.
Gathering derivative information
The main difference between Tier 2 and Tier 3 is the collection of risk factor stresses, which is useful when schemes use derivatives. As part of our consultation, we wanted to understand if there were merit in collecting detailed information on derivatives for a larger proportion of schemes. Seven out of ten respondents agreed.
Respondents highlighted that schemes that use derivatives most likely use them as part of LDI or other hedging approaches to risk. Therefore, some respondents suggested having a simpler way to capture derivative information within the scheme return, rather than ‘trading-up’ to Tier 3. We discussed this and decided it would be impractical given that the tier system is based on a simple allocation of assets by value in the lower tiers and we wish to retain this simplicity to help smaller schemes. We recognise that this is inappropriate for derivatives, where their market value and a simple categorisation can be extremely ineffective at assessing their impact on risk levels. However, schemes can better record their risk characteristics when holding derivatives by moving up to Tier 3, where stress tests will capture risk more accurately.
As we set out in the consultation, there are risks of unintended consequences if we ask all schemes about their derivative holdings. In particular, we are concerned this would create additional burden for small schemes, given that specialist professional advice would tend to be required. As a result, neither TPR nor the PPF plans to collect specific information about derivative allocations beyond the risk factor stresses for Tier 3. We will periodically review this based on market developments.
5. PPF proposals for indices
Our main consultation proposals in this area were:
- Continue using a limited range of indices for roll-forward, but views were sought on the merits of sourcing separate indices for some or all of the new asset sub-classes in Tiers 2 and 3.
- Treat the ‘Other’ category as cash and roll forward the corresponding holdings using a PPF-generated index which replicates returns in line with Bank of England Base Rate.
- Use a composite roll-forward index for DGFs comprising 60 per cent equities and 40 per cent gilts.
- Roll forward absolute return fund holdings using a PPF-generated index which replicates returns in line with Bank of England Base Rate plus 3.5 per cent.
Simplified roll-forward versus a more sophisticated approach – questions
We asked the following questions:
- Do you agree that maintaining a simplified roll-forward approach is appropriate given the relative costs and benefits (rather than establishing a more sophisticated approach using a wider range of indices)?
- Do you agree that if a more sophisticated set of indices is applied then those proposed would be appropriate?
- If you favour an intermediate approach between the two approaches we have outlined, for which of the proposed asset classes would separate indices be beneficial?
Analysis of comments, deliberations and conclusions
Just over half (13 out of 22) of the respondents expressing an opinion favoured the simplified roll-forward approach which we put forward as our core proposal.
The key reason cited was the disproportionate cost and complexity of sourcing more granular indices, for what would generally be a relatively short roll-forward period.
Only three respondents favoured the alternative approach, with separate indices sourced for each of the asset sub-classes in Tiers 2 and 3. The remaining six respondents each favoured some form of intermediate approach (though not necessarily the same intermediate approach).
Comments made by respondents in both of these groups noted the availability of the duration-specific gilt indices and the desirability of increased accuracy in the roll-forward where there are significant allocations to particular asset sub-classes.
All six of the ‘intermediate’ responses advocated a move towards a more granular approach to the bond sub-classes. However, only one was in favour of adopting separate indices for the two overseas equity sub-classes (developed and emerging markets).
Our response and conclusion
The PPF has decided to implement the simplified roll-forward approach (put forward as our core proposal in the consultation) for the initial year of implementation. We note the comments made in support of this approach and the fact that a small majority of respondents were in favour. However, we are mindful of the potential benefits of a more sophisticated approach where there are significant allocations to particular asset sub-classes.
With this in mind, the PPF will review the approach after implementation, and consider if any sub-classes have sufficient overall allocations to warrant the use of more granular indices in the context of likely impact on levies.
To inform this decision we have constructed hypothetical examples relating to a notional scheme with assets of £100 million at various representative dates. For simplicity, all holdings are assumed to be in fixed-interest UK Government bonds of varying maturities. Table 2 below compares the smoothed but unstressed asset values (UA in the terminology of our levy rules) after roll-forward to 31 March 2021, using the simplified and more granular indices set out in the consultation document.
The figures below suggest that (for the scenarios considered), a fairly even split of gilt holdings by maturities should give similar results whether the simplified or more granular approach is used. More material divergences are likely to occur when schemes are significantly under- or over-weight in any particular maturity, with long maturity weightings generally serving to understate the smoothed asset value under the simplified approach (and vice versa).
Table 2: Roll-forward of £100 million fixed-interest UK Government bond holdings from asset valuation date
| Simplified approach | Split of maturities under granular approach | ||||
|---|---|---|---|---|---|
| Asset valuation date | Maturities irrelevant | All short | All medium | All long | Equally split short/medium/long |
| 31 March 2020 | £91m | £99m | £94m | £86m | £93m |
| 31 March 2019 | £100m | £100m | £99m | £101m | £100m |
| 31 March 2018 | £104m | £101m | £104m | £105m | £104m |
| 31 March 2017 | £104m | £100m | £103m | £108m | £104m |
Approach to rolling forward ’Other’ holdings, diversified growth funds and absolute return funds – questions
We asked the following question:
- Do you agree that the index proposals are appropriate, in particular the approach to roll forward ’Other’ holdings, diversified growth funds and absolute return funds?
Analysis of comments, deliberations and conclusions
The consultation responses were broadly supportive of our proposals for these asset classes. Some respondents noted that a cash-based roll-forward for ‘Other’ holdings and absolute return funds should not be taken to imply a cash-based asset stress factor for these classes, and that the performance of any individual absolute return fund could deviate significantly from an industry benchmark, particularly over short timeframes.
We have decided to implement the proposed roll-forward indices for ‘Other’ holdings, DGFs and absolute return funds. We note the comments made regarding the stress factors for ‘Other’ holdings and absolute return funds. The PPF will consult on the proposed stress factors for each of the new asset classes at the appropriate time. We expect this to form part of the 2023/24 levy consultation.