PPF criticises industry's customer service after weathering tricky year

Schemes including the giant Kodak Pension Plan No.2 fell into the £32bn fund over the past twelve months, bringing in an additional 17,119 members.

Just shy of 400,000 members are now protected by the PPF and the Financial Assistance Scheme. Another 150,000 members belong to schemes currently in the PPF’s assessment period.

With the scheme’s probability of success still relatively high at 89 per cent, the PPF’s chief executive Oliver Morley is turning his focus to improving the service his organisation can deliver to its members, who he refers to as “customers”.

“The financial services industry as a whole isn’t, I’d say, on the cutting edge of customer service, and the pensions industry is less so,” he tells Pensions Expert.

A former head of customer experience at Thomson Reuters and most recently chief executive of the Driver and Vehicle Licensing Agency, Mr Morley says he would like to use his “outsider” status to improve standards across the industry.

“We’re investing both in improving the technology and the digital services that we can offer, but we’re not doing that at the expense of the more traditional services,” he says.

With its administration now run in-house and allowing members to carry out several transactions online, the PPF has 97 per cent customer satisfaction. Over 80 per cent of stakeholders are clear on the PPF’s objectives and confident of its ability to meet them.

Industry playing catch-up

The same cannot be said of the wider pensions industry, where a race to the bottom on administration price is commonly seen to have lowered standards.

The Pensions Regulator has taken action against both defined benefit and defined contribution schemes over poor record-keeping and other aspects of administration.

“My experience of customer service and in particular administration, is that [paying less] is a false economy really. You think you’re saving money by going for the lowest-cost administration and it will just create problems for you coming down the line,” says Mr Morley.

The PPF often has to deal with the consequences of poor record-keeping. With the launch earlier this year of guidance for trustees in distressed situations, it bemoaned the inaccuracy of most benefit payments it takes over.

But Mr Morley reminds trustees that this issue can also deliver benefits such as improved pricing from bulk annuity insurers.

Margaret Snowdon, president of the Pensions Administration Standards Association, agrees that customer service is lacking in pensions, attributing the failures both to administrator attitudes and to trustees not being willing to pay a fair price for quality.

“One of the things I’m most concerned about is the fact that administrators are being encouraged to take on new business at low or no cost,” she says. “There are no profits in administration so there’s no money to invest in automation.”

Administrators also have their part to play. Out of a universe of almost 300 administrators, only a handful have agreed to be measured and accredited by PASA.

“A lot of administrators, and I’d probably say smaller ones... They sometimes don’t know what good looks like,” she says, but adds that the combination of bulk annuity transactions, regulatory scrutiny and impetus behind consolidation could be catalysts for change.

Funding dips but remains at target

While the PPF’s increasing membership is sharpening its focus on customer service, it has also had a more immediate impact, although largely offset by other factors, on the stability of the lifeboat.

While reserves grew from £6.1n to £6.7bn, the underfunded nature of the schemes it absorbed led its funding level to drop to 118.6 per cent from 122.8 per cent. With the exception of the Kodak scheme, claims were below average.

The key measure used by the PPF itself, which models the chances of self-sufficiency by 2030, has dropped by two percentage points, meaning it is now predicted to be successful in 89 per cent of scenarios.

Andy McKinnon, the PPF’s chief financial officer, reveals that 89 per cent was in fact the fund’s target, given its forewarning of likely large claims.

That could be further dented if Britain’s less future-proofed businesses are unable to weather what some see as the impending turn of the business cycle. Mr Morley says the companies that face hardship are plain to see in sectors like retail: “You go to a wide variety of retail outlets and you can see the ones which are doing well and the ones who aren’t.”

Looking out into the future and assessing when claims are likely to hit is much harder, although Mr McKinnon is relaxed about the current state of DB funding.

He dissects the lifeboat’s 7800 funding index, which has flipped dramatically between surplus and deficit, pointing out that the risk posed by schemes in deficit has stayed relatively stable at around £200bn.

“If all the big ones come in next week... Then we’d have to slightly change tack on our funding,” he says, but adds: “When we say 89 per cent we quite literally mean that in 890,000 of those scenarios we meet the target.”

German peer's case an unquantifiable risk

Liabilities were also increased by the impact of a European Court of Justice ruling that meant members must receive at least 50 per cent of the value of the pension they were originally promised by their employer.

The fund has put aside £300m – by its standards a relatively paltry sum – to deal with the uplift it will have to provide to its wealthiest members.

However, another ECJ case, although far from certain to impact the PPF, poses a much more stark threat.

Advocate General Gerard Hogan gave an opinion in June that the PPF’s German equivalent should cover the entirety of the benefits promised to members. Brexit notwithstanding, if the court is persuaded and follows the opinion of Mr Justice Hogan, the rule could be incorporated into the EU Solvency Directive and mean massive cost increases for the PPF and its peers.

Mr Morley points to the difference between the £200bn of scheme deficits when measured on the PPF’s section 179 basis, and the full buyout costs of those schemes, likely to be three or four times higher.

“If you were to say that we had to fully match the benefits, that’s the difference between those deficits effectively,” he says, but is keen to point out that the outcome of the case is far from certain - and further complicated if the UK leaves the EU as planned.

Returns stay strong across most asset classes

Key to maintaining the PPF’s resilience has been the fund’s investment strategy - 77 per cent portion of the scheme’s funding now comes from incoming assets and returns, with the remainder funded by the levy on solvent employers.

Under the watch of chief investment officer Barry Kenneth the fund delivered a total return of 5.2 per cent despite market turmoil over the last 12 months, beating the previous year’s 3.2 per cent.

Only emerging market debt posted losses for the year, although Mr Kenneth admits that “at different parts of the last 12 months it has been uncomfortable”.

He puts the performance down to “a combination of good risk management and placing our bets in the right place”, attributing a significant portion of the return to “the fact that we manage our liabilities quite effectively - part of that return comes from the government bond portfolio”.

Unlike most schemes, who leave their hedging to an asset manager via a segregated mandate or pooled fund, the PPF has insourced its matching book - and Mr Kenneth reveals a key advantage of doing so.

Because PPF pensions are uprated according to statutory minimum inflation protections, they follow the consumer price index, rather than the retail price index, which is used for the vast majority of government and corporate bond issuance. With most DB schemes exposed to RPI in their scheme rules, asset managers have tended to follow suit and hedge against RPI.

"We must be one of the few that actually manage actively against a CPI benchmark," says Mr Kenneth, who has previously worked on the sell-side of the interest rate and inflation derivatives market. "We manage it moe like a bank trading book than as an asset manager."

The mismatch between CPI liabilities and RPI assets is a concern for the wider scheme universe too. "Most of our clients will have some element of their liabilities linked to CPI but typically RPI has been the only game in town," says Simon Bentley, head of LDI client portfolio management at BMO Global Asset Management.

Trustees may have previously got away with allowing this error in their hedging programmes. However, with the House of Lords recommending in January that the UK Statistics Authority fix a methodological flaw in RPI and that the government move to a single measure of inflation in the future, the risk for those with some CPI liabilities but hedging RPI is that "RPI-linked liabilities fall in value but the CPI-linked liabilities don't", says Mr Bentley. He recommends that schemes carefully investigate and outline the exposure they have, and then give their LDI manager time to pick up the correct matching assets at an opportune price, given the relative scarcity of CPI-linked corporate bonds and swaps.

Late cycle risks prompt defensive stance

Indeed, the maturity of the current economic expansion mean that the PPF is now defensively positioned relative to its strategic asset allocation, with the fund now looking for assets that can ride out a downturn.

“Where we think that the investment will do well through the cycle, then we’ll still commit capital to it,” Mr Kenneth says.

At 24.1 per cent of its overall portfolio and roughly half of its return-seeking allocation, private debt, private equity, property, infrastructure, farmland and timber play a prominent role. While Mr Kenneth says he is cautious about new opportunities, he points out that infrastructure assets can prove resilient to market turbulence.

While Mercer’s 2019 asset allocation survey shows the rest of the UK scheme universe catching up with a 24 per cent commitment to these assets on average, the wide variety of assets the PPF has taken on, and the demands of running them directly, attests to the scale needed to build a sophisticated in-house alternatives strategy.

While the PPF is an investor in high-profile mega-deals such as the Thames Tideway supersewer project, it has also renovated brownfield sites acquired during the collapse of UK Coal. Speaking to Pensions Expert, Mr Kenneth has just returned from visiting a Queensland cattle farm that the fund is attempting to convert into a successful meat brand.

He also hints at the possible derisking of the PPF’s portfolio, in line with the end-game being played out at many UK corporate DB schemes.

Explaining the PPF’s choice to move less risky assets in-house before more return-seeking investments, he says: “Am I confident we’re going to managing private equity in 10 to 15 years’ time?... At some point we may look more like a monoline insurer.”