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UK lifeboat fund boosts reserves as claims fall

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The UK’s Pension Protection Fund (PPF) increased its surplus by almost 50% in the 12 months to the end of March, helped in part by the resolution of the BHS pension scheme case.

In its annual report, the lifeboat fund for defined benefit (DB) pension schemes recorded a 16% investment return, which helped its surplus grow to £6.1bn (€6.9bn), from £4.1bn a year earlier. This matches the liabilities of schemes currently being assessed for entry into the fund.

Claims for compensation fell significantly year-on-year, to £252.4m from £475.9m a year earlier. This fall was due mainly to the settlement reached by The Pensions Regulator (TPR) regarding the BHS pension schemes, according to the report.

In March, the regulator agreed a cash settlement of up to £363m with former owner Sir Philip Green, and the trustees are in the process of setting up a new pension fund, which is expected to keep the majority of members out of the PPF.

In addition, CIO Barry Kenneth highlighted a settlement involving the Nortel Networks UK Pension Plan as another boost to the PPF. A legal ruling in May meant the fund could be in line for a windfall of up to £1bn, which was expected to be enough to keep it out of the PPF. The Nortel scheme has been in the PPF’s assessment period for eight years after its Canadian parent company filed for bankruptcy in 2009.

Despite the strong performance, chief risk officer Hans den Boer used his commentary in the report to voice concern over the average length of deficit recovery plans for schemes that were not fully funded.

“The average recovery plan length has not reduced in the last decade, and the fact that deficits are not being closed presents a significant risk to the PPF by increasing the potential for future claims,” he said. “We work closely with TPR and others to reduce their impact but we believe some targeted improvements to TPR’s powers are appropriate, as we set out in our response to the government’s green paper on the DB pension system.”

At the end of May, the PPF’s own figures for the UK’s private sector DB schemes showed an aggregate deficit of £232.3bn.

Investment plans

The PPF’s allocations to alternative credit and minimum variance equity strategies produced the best performance, gaining 11.8% and 12.3% respectively.

Kenneth said alternative assets were “a key component” of the PPF’s return-seeking allocation.

“In partnership with leading managers we have made a number of large direct investments this year across private companies, energy, farmland and real estate assets,” the CIO said. “The PPF has established itself as a credible partner that is able to execute these complex transactions and hence we are being presented with an increasing number of opportunities to review.”

Kenneth also confirmed plans for the PPF to bring parts of its currency and credit management in-house.

He said: “We see insourcing as a way of increasing our ability to meet the specific nuances of the PPF portfolio, rather than solely a cost saving measure. As such, we will continue to look for opportunities but will only insource where we believe we can improve our performance compared to external fund managers.”

Chief financial officer Andy McKinnon told IPE the fund had recently completed the third “tranche” of transfers from external providers to its in-house liability-driven investment (LDI) team. The bulk of this strategy is now run by the team, led by head of LDI Trevor Welsh.

In his commentary, McKinnon said insourcing had helped keep a lid on asset management costs – although investment expenses still rose from £113.5m in 2015-16 to £152.7m in 2016-17.

McKinnon said: “External management fees grow with the size of the fund and this drove a significant uplift in 2017, also reflecting a greater focus on longer-term alternative asset classes in line with our [investment principles] and increased
 by payments to some fund managers which delivered significant excess value and are remunerated on a performance basis.

“Insourcing investment activity in 2017 has helped to contain the growth in fees and that effect will be greater as we start to scale the operation in 2018 and 2019.”

The PPF’s operating costs totaled £60.4m, an increase of £5m year-on-year but below its budget.

Industry levies

The PPF is partly funded by a levy charged to DB schemes – this totaled £585m in 2016-17. The fund aims to be “self-sufficient” by 2030, removing the need for the levy. According to scenario testing from ratings agency Moody’s, at the end of March there was a 93% likelihood of the PPF achieving this aim.

Joe Dabrowski, head of governance and investment at the Pensions and Lifetime Savings Association, said: “It is important that the PPF remains strong given the significant amount of risk that still exists in the DB sector. However, schemes will be looking at these results with an eye on their levies and expect the PPF to continue, or accelerate, the downward trend in the overall quantum.”   

Key figures

Source: PPF annual report
 March 2017March 2016
PPF assets under management£28.7bn£23.4bn
Funding ratio121.6%116.3%
Investment return16%1.7%
New schemes transferred6233
New schemes AUM£1.3bn£0.6bn

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