PPF remains well-equipped to meet DB financial challenges

The data in this year’s Purple Book show that the funding level of the DB universe, a measure of a scheme’s ability to pay Pension Protection Fund compensation, is the highest it has been since March 2014 and has increased to 95.7 per cent (on an s179 basis).

While we have no crystal ball, we are well aware that the regulatory, economic and political environment remains uncertain

Half of the increase since the previous year’s Purple Book has been driven by market factors; we have seen gilt yields of almost all durations increase during the year, which has driven down liability values.

We have also seen a year-on-year increase in equity markets, which has driven asset values up. This upward trend in asset values has been fairly consistent, having now witnessed almost a decade-long bull run.

While this is a relatively positive picture, we are mindful of the challenges we face; liabilities remain volatile, and it is important not to lose sight of the fact that more than 3,000 schemes in the DB universe are in deficit, and the combined deficit of these schemes is still close to £150bn.

Risks reduction measures

The Purple Book also highlights the necessity of schemes undertaking effective risk management and reaffirms the importance of the PPF safety net for members of schemes that fail to pay what they promised.

Over the past 10 years we have seen a fairly significant derisking of scheme asset portfolios, with the proportion of equities held decreasing, and bonds increasing.

We have also seen an increase in the implementation of specific risk reduction measures, such as special contributions, which do remain relatively healthy, as well as an increase in risk transfer deals.

However, we would caution that these measures, while effectively reducing risk, would have to continue to trend upwards over a long period to have a significant impact on the liabilities that the PPF protects, which stand at around £1.6tn.

Looking ahead…

While we have no crystal ball, we are well aware that the regulatory, economic and political environment remains uncertain.

The data in the Purple Book is vital for helping us understand the risks the PPF faces. It also helps us understand how much compensation we might need to pay in future, as well as helping us forward-plan our funding and investment strategies to make sure we have enough money to pay all our current and future members.

We remain in the business of preparing for the long-term, and despite recent large claims, the PPF remains robust and well-equipped to meet the financial challenges that exist within the DB universe we protect.

Andy McKinnon is chief financial officer at the Pension Protection Fund