The UK Pension Protection Fund (PPF) returned more than 11% last year and was able to increase its funding to nearly 110%, according to its 2012-13 annual report.
However, the lifeboat scheme also collected levy payments nearly 20% above its initial £550m (€644m) estimate, after a lower than expected use of contingent assets by defined benefit (DB) schemes saw them fail to offset charges.
The PPF saw the likelihood of its achieving self-sufficiency by 2030 – no longer relying on the levy to fund its activities – increase to 87%, and reported a £1.8bn surplus, equating with a funding level of £109.6%.
Chairman Lady Barbara Judge said the fund remained “firmly on our glide path” to self-sufficiency, despite the risks facing the PPF remaining high.
“As well as a record year for claims, we saw pension scheme funding worsen during 2012-13 and, although long bond yields have recovered a little since then, scheme funding remains at low levels,” she said.
Discussing its investment performance, chief executive Alan Rubenstein noted that the 11.1% return equated with investment gains of £1.6bn, partially boosted by its hedging activity keeping pace with increasing liabilities.
“Returns on our managed assets, which ignores the impact of hedging, were also positive, outpacing their benchmark by 4.6%,” he added.
The PPF’s assets under management rose to £14.9bn, of which only £1.2bn remained invested in equities due to the fund’s approach of avoiding the same risk it is exposed to through company insolvencies.
Nearly all assets remain invested in debt instruments – covering assets including derivatives, repo agreements and sovereign and corporate debt.
The fund also noted that the reported financial year was the first under the new levy framework, linking payments to the risk that individual schemes pose to the PPF, and saw an increase in expected payments.
“Under these new rules, we saw a fall in the number of contingent assets and other risk-reduction measures submitted for individual levy purposes,” it said.
“This meant we collected about 18% more for the 2012-13 levy year than our original £550m estimate.”
The report explained that the fall in contingent assets was a product of the fact that many of the ones put forward “failed to provide a genuine reduction in the scheme’s risk”.
James Walsh, policy lead at the National Association of Pension Funds, said the fact the PPF’s finances were sustainable was “welcome news”.
“Although the PPF is now more confident of hitting its long-term targets, the average levy paid by individual pension schemes is set to increase in the short term, and this remains a concern,” he said.
“The NAPF remains committed to working with the PPF on keeping the levy affordable.”