The extent to which the coronavirus crisis hits employers with relatively large defined benefit (DB) deficits will be a key determinant of whether the UK’s DB lifeboat fund can cope without the need arising for extreme measures such as cutting compensation, according to analysis from LCP.
Using two modelled scenarios, the consultants showed that the £32bn (€35bn) Pension Protection Fund (PPF) is likely to face a multi-billion pound hit as a result of insolvencies in the wake of the Covid-19 crisis.
In a scenario assuming a similar rate of insolvencies as followed the 2007/08 financial crash but based on more recent claim levels, the hit on the PPF is £10bn.
A £20bn scenario reflects a deeper economic downturn where PPF claims are focussed on companies with larger deficits.
LCP said its analysis indicated that even in the more serious scenario of a £20bn hit, a combination of adjustments to the PPF’s funding strategy and self-sufficiency targets could be enough to cover the deterioration in funding without the need to cut benefits.
The measures that the PPF could take to absorb even a relatively large series of additional liabilities included putting back the date at which it was targeting self-sufficiency, accepting a lower target probability of achieving self-sufficiency, and raising levies.
However, LCP warned that the biggest risk to the PPF would come if the current crisis hit sectors of the economy that tended to have relatively large DB deficits.
If several long-established employers with large DB schemes in sectors such as manufacturing, aerospace and high street retail were all to face insolvency in the coming years, “even the more serious £20bn could prove to be an under-estimate”, it said.
Should a much worse scenario than that arise, additional actions may have to be seriously considered, “including the possibility that the government attempts to reduce past and future PPF compensation”, the consultants said.
“The crucial question is whether the insolvencies which we are likely to see in the coming years will hit firms which also have large DB deficits”
LCP partner Jonathan Wolff
LCP partner Jonathan Wolff said it was reassuring to see that the PPF was relatively well placed “to navigate the current choppy waters” “but warned against complacency.
“Recent history has been a reminder that the crucial question is whether the insolvencies which we are likely to see in the coming years will hit firms which also have large DB deficits,” he said. “There remains a risk that too many such insolvencies could put a serious strain on the system”.
PPF view
David Taylor, PPF executive director responsible for the PPF levy, said: “Our members, levy payers and those protected by the PPF should not be concerned with speculation about our ability to weather the current economic situation. Our latest modelling shows that we are well placed to achieve our self-sufficiency target and our 2020/21 levy estimate remains unchanged from its announcement last year.”
The PPF is due to publish its 2019/20 annual report and accounts in the autumn, later than planned because some assets needed more time for complete valuations to be obtained. It has in the meantime published its first standalone responsible investment report.
LCP said it also considered the effect of some non-Covid-19 factors facing the PPF, such as the move from RPI inflation to CPIH and the effect of recent court cases on PPF compensation.
This article was amended after publication to include an updated comment from the PPF.
