How the pensions lifeboat is steering towards its 2030 funding target

The PPF’s liabilities are long term, meaning our investment approach is focused on ensuring we can meet those liabilities as they are due. Put simply, it ensures we can pay members the compensation they are entitled.

To achieve this, we run one of the largest liability-driven investment programmes in European pensions.

The PPF employs a range of financial instruments, and increasingly hybrid assets, to closely match liabilities and those of the schemes in our assessment period that are expected to transition to us.

To date, the strategy has paid off; we have achieved returns in excess of the liabilities during an extremely turbulent period in global markets.

Despite falling gilt yields and a background of increasing pension scheme liabilities, the fund has continued to perform well and remain financially resilient.

LDI improvements

Over the past two years we have worked to improve our existing LDI process, bringing a second LDI manager on board.

This involved increasing control of and redefining key hedging processes, the development of independent relationships with a large number of counterparty banks, and the creation of a single collateral pool managed by an independent collateral manager.

This operating model has diversified the dependence on one LDI manager and enables the fund to take more control of the process.

We have a greater understanding of the methodology and assumptions behind the liability benchmark calculation, and the risks to which we are exposed, which will enable us to make changes more easily, ultimately improving how we hedge our liabilities.

This sits alongside a strong risk-monitoring and management framework. It means we can attribute risk and performance to a variety of factors, from the total liability level through to the investable benchmark, and all performance contributors, including third-party alpha and our own tactical positioning.

Risk factors measured include: the impact of interest rates, retail price index inflation, RPI inflation versus consumer price index inflation, RPI volatility and its impact on inflation caps and floors, as well as gilt versus swap spreads and iota risk (the difference between gilt and swap inflation).

Being able to measure all of these risks effectively enhances our governance of the overall funding strategy.

Most importantly, by ensuring our assets reflect our liabilities we can be confident we are making steady progress towards our 2030 funding goal, giving confidence to those the PPF protects. 

Barry Kenneth is chief investment officer at the Pension Protection Fund