The UK’s defined benefit lifeboat fund is working to develop a new long-term risk model that it said will provide it with the platform and tools for it to make a “step-change” in how it manages and approaches its balance sheet risk.
In its annual report, the Pension Protection Fund (PPF) said its current financial year would see a major project to develop the model, “introducing increased functionality to meet the modelling requirements of key stakeholders”.
The PPF is due to carry out a full review of its funding strategy next financial year – 2021-22.
“Our existing LTRM has served us well, but as we move closer to our funding horizon we need a tool that is more flexible and adaptable and one that allows us to be increasingly responsive to the needs of the organisation,” the PPF said.
“We need to make informed decisions at an ever-increasing pace. We are developing a new model which will allow us easier access to information about how the organisation could evolve in the future.
“An improved level of information and insight will allow us to shape and evolve our strategies and activities so we can assess our confidence that we remain on track.”
‘Probability of success’ slump
The long-term risk model is what the PPF uses to estimate its so-called “probability of success” – how likely it is to reach its target of being at least 110% funded by 2030.
This slumped from 89% to 83% over the course of its financial year, with a COVID-19-fuelled adjustment to the insolvency outlook the single biggest driver.
Jonathan Wolff, partner at consultancy LCP, said it seemed likely the PPF was assuming over £1bn (€1.1bn) of additional claims with regard to the coronavirus impact.
The PPF said the 83% probability of success “at this stage of our development still indicates a good level of confidence that we remain on track to meet our funding target”.
Reserves at the lifeboat fund shrank by 16% year-on-year, to £5.1bn, due to the coronavirus pandemic’s indirect impact on its return-seeking assets.
The funding ratio at the now £36.1bn fund fell from 118.6% to 113.4%, a 5.2 percentage point decrease driven by the COVID-19-related market turmoil in March.
Joanne Shepard, director in Willis Towers Watson’s retirement practice, said the fall was much smaller than that experienced by many pension schemes.
“More worrying for the PPF will be the prospect of new claims as new economic realities catch up with more companies – it’s unsurprising that [CEO] Oliver Morley says this risk will be the PPF’s focus.
“There is a lot of uncertainty about the scale of these future claims – not just how many companies become insolvent, but which companies and how big their pension deficits are.”
More investment insourcing
Separately, PPF’s annual report revealed it has completed further investment insourcing, bringing in house the management of its foreign exchange portfolio and part of the buy-and-hold UK credit portfolio.
It said it now managed the majority of its assets in house.