The Pension Protection Fund currently has more than 225,000 members who rely on us to pay compensation for their lost pensions.
Since we were first set up in 2004 we have paid £2.4bn in compensation. Thanks to the existence of the PPF, 11m defined benefit scheme members can be reassured that their retirement savings will be protected if their scheme’s sponsoring employer goes bust.
The PPF has established itself as a credible investor with the ability to execute complex transactions
The PPF currently has more than £23bn in assets under management. Our funding objective is to have enough money to pay compensation to our members for the rest of their lives. We also make some provision for schemes that will enter the PPF in future, while striking a balance between growing the fund and charging a fair and proportionate levy to the schemes we protect.
Hedging programme
Claims tend to increase at times when the UK economy is weakening, due to the higher probability of insolvency and the impact of interest rate and inflation risk, so the fund is structured to withstand unexpected events and market volatility.
The fund is roughly split into two – a liability-driven investment portfolio and the return-seeking portfolio. The LDI portfolio aims to match the interest rate and inflation sensitivity of our liabilities, largely protecting the fund from these fluctuations. It includes gilts, inflation swaps, and other long-duration assets designed to match a 50-year projected stream of liabilities.
Delivering growth
The rest of our assets are in a return-seeking portfolio. This is divided between illiquid assets like real estate, private equity and alternative credits, and liquid assets that include publicly traded equities, credit and government bonds. The return-seeking portfolio aims to deliver additional returns over and above what is needed to cover liabilities, while maintaining conservative risk limits.
The PPF’s funding strategy: A long-term view
More than a decade after our creation we remain confident of our financial position.
Diversification is hugely important and we have been building our exposure to hybrid and alternative assets as part of our evolving asset allocation strategy. As well as providing diversification benefits, these investments provide an attractive risk-adjusted return and are well suited to our long-term liabilities.
Infrastructure is a distinctive feature of the portfolio. For example, in 2016 we partnered with Legal & General Retirement to provide £400m of long-term financing for DP World’s London Gateway – the most significant port development in the UK for more than 20 years.
The PPF has established itself as a credible investor with the ability to execute these complex transactions. As the PPF continues to grow we will continue to work with other pension providers and institutions on innovative investments where we see collaborative opportunities.
In order to make our investments as successful and efficient as possible, we have been gradually insourcing part of our investment management capability over the past two years. This gives us added control and flexibility to manage our assets effectively for the benefit of our levy payers and members.
Ian Scott is head of investment strategy at the PPF
