The saviour comes of age
Judge’s comment: “Continues to impress with its funding strategy and investment model. Expansion of the portfolio to include hybrids should help it maintain its risk-adjusted return objectives.”
This year marks the tenth anniversary of the €31.6bn Pension Protection Fund (PPF). During that time it has grown considerably, now protecting 222,597 members, while continuing to give reassurance to the 11m people in over 6,000 defined benefit schemes that the PPF will provide protection in cases of sponsor bankruptcy. This ambition is as important now as it was ten years ago, and is a responsibility that the PPF expects to continue into the 22nd century.
All areas of the PPF’s business have improved and developed over the past ten years. The growth of the organisation, which now employs over 250 staff, has led to increased capabilities. Most notably, it has restructured its management framework and in 2015, recruited its first chief risk officer to maintain and enhance financial and operational risk management. This is supported by the comprehensive data set that it has developed, giving the PPF a good understanding of its risk exposure, which in turn drives its funding strategy.
Since 2006, a levy on UK pension schemes has been the PPF’s largest source of funding. However, as it has grown, its own invested assets have become increasingly important. Since its inception, the PPF has sought to maintain an innovative and forward thinking approach to investment management. The investment strategy has continued to evolve, delivering an investment return of 25.9% for the year to end-March 2015.
In July 2014, the PPF published a revised Statement of Investment Principles. The fund previously managed its asset allocation by means of a primary focus on matching its liability profile, while also seeking opportunities for excess returns. However, the 2014 review allows for expansion of the portfolio to include greater use of alternative investments, such as secondary private equity and farmland.
So called hybrid assets are also an increasingly appealing investment class for the PPF, since they offer both growth potential and liability matching characteristics, enabling the fund to adapt to changing market conditions and financial regulation by acquiring assets that provide long-term cash flows with less reliance on derivatives. To date, much of the PPF’s liability hedging has been through financial instruments rather than real assets. Its first significant hybrid asset investment was completed in June 2014, with the direct purchase of a large office building in central Manchester to an investment grade tenant through a long-term lease.
This investment provides the fund with a lease contract for 23.5 years, with an annual 3% uplift in rental income, providing good liability matching characteristics. The PPF aims to complete its new target asset allocation within the next two years such that hybrid assets will account for 12.5% of its portfolio. Cash and bonds will make up 58%, alternatives will rise to 22.5% while equity exposure will decrease to just 7%.
The PPF’s strategic ambition is to be financially self-sufficient and it will continue to review the investment strategy as it moves closer to this target. Consequently, it is now looking at the feasibility of developing an in-house investment capability as a long-term plan. This will enable it to react to market changes very quickly, while providing a better understanding of how things affect it more directly.
As it reflects on the past ten years, it is clear that the PPF continues to achieve what it set out to do: protect people’s futures and act as a lifeboat to those who find themselves in an occupational pension scheme that can no longer meet its obligations. This objective is as important to the PPF now as it was a decade ago, and remains its key priority as it continues to evolve.
Essentials to 31 March 2015
Pension Protection Fund
Founded in 2005
Defined benefit multi-employer fund
- in the PPF: 222,597
- active in schemes paying into the PPF : 11,000,000
- one year: 25.9%
- Lifeboat fund for more than 11m people in over 6,000 UK defined benefit schemes
- Inclusion of hybrid assets to eventually account for 12.5% of overall assets
- Long-term development plan to increase in-house investment management
- Almenni Pension Fund Iceland
- Construction Workers’ Pension Scheme Ireland
- Industriens Pension Denmark
- NEST United Kingdom
- PensionDanmark Denmark
- Superannuation Arrangements of the University of London (SAUL) United Kingdom
- Patrick Ferguson
- Paul Kelly
- Stefan Lundbergh