UK - The combination of recent market volatility and an expected slowdown in UK economic growth is likely to result in higher corporate insolvencies over the next 12 months, according to the Pension Protection Fund.

In its three-year management plan the PPF suggested by 2012 the membership of the PPF, currently 130,823, could be "rivalling" the largest defined benefit (DB) schemes in the UK, while assets under management could exceed £15bn (€19.1bn).

Future estimates by the PPF suggest membership is expected to reach 205,000 by the end of March 2011, while the number of cases transferring to the PPF is expected to level out at around 80 cases per year by the same date.

That said, the PPF highlighted while the number of company insolvencies has been on a "downward trend", it warned the "recent turbulence in financial markets, together with an expected slowdown in UK economic growth, is likely to result in higher corporate insolvencies in the next 12 months".

As it pointed, already some indicators of credit risk, such as credit default swap (CDS) spreads and Moody's estimated default frequencies, are "currently showing a higher likelihood of corporate distress".

DB schemes potentially eligible for the PPF are sponsored by a range of employers including public companies, private companies and small and medium-sized enterprises (SMEs), which according to the PPF "all pose very different risks".

However, in the management plan the PPF highlighted while there is likely to be a steady stream of SMEs becoming insolvent in any given year - representing the majority of claims on the PPF in terms of members - it warned "this may be exacerbated should the economic environment deteriorate significantly, but may only feed through during 2009".

The figures in the plan revealed at the end of March 2008 the PPF received 1,813 notices of qualifying insolvency, however of these only 95 cases entered the assessment period and only 32 were transferred to the PPF, although a further 14 were either rescued or agreed a buyout deal.

The PPF estimates the number of qualifying insolvency events will remain at around 1,800 over the next three years, although it pointed out as is currently the case, many of the notices could be rejected as they involve defined contribution (DC) schemes, stakeholder plans and other pension arrangements which are not eligible for compensation.

While the figures revealed a small drop in the estimated number of cases entering assessment - from 95 to 90 - over the next three years, it predicts the number of cases transferring to the PPF will jump from just 32 to 94 in 2009, and 80 in the following two years.

Despite this, the plan shows salary and related costs for the PPF are forecast to reach £9.78m, which equates to 48% of the overall administration costs - a fall from 2007 - and the body claimed this "downward trend will continue into the plan period and demonstrates improved operational efficiency and the benefits of automation as more members enter assessment and compensation".  

Other key issues outlined in the plan included:

Consulting on developing the pension protection levy so it better represents the long-term risk final salary pension schemes pose to the PPF; Developing a long-term investment strategy to ensure it remains appropriate as levies are paid and more scheme assets transfer to the PPF; Introducing new technologies to streamline the PPF's work, and Strengthening relationships with all those interested in the work of the PPF. Partha Dasgupta, chief executive of the PPF, said: "Strengthening our financial resilience will remain an important priority for us, particularly having seen the recent marked volatility in the financial markets, with the resulting knock-on affect on pension scheme funding."

As a result, the PPF confirmed it would be publishing further documents later this year, including an updated strategy document and a consultation on how the PPF levy could be distributed from 2011, which may include a focus on investment strategy and risk.

In addition, the document noted James Purnell, the secretary of state for work and pensions, confirmed in a Parliamentary debate on April 22 2008 subject to the results of the consultation published on March 27 2008, the government was "hopeful that the PPF will be able to take a formal operational role in the extended FAS scheme".

This follows pressure on the government to bring the two compensation bodies together in order to improve efficiency.

The PPF revealed the package of draft regulations currently under consultation offers the potential for the DWP to "seek advice from the PPF on FAS operational issues", although it was possible a "broader role" could emerge.

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