PPF reserves could be ‘wiped out’ by one or two big claims

In a video conversation with LCP partner Steve Webb, Mr Morley said that however large PPF reserves might appear to be, there is no room for complacency, with potentially hard times ahead. 

I will be very supportive of a well-run superfund; I will be extremely worried by one which is in a fairly freewheeling regulatory environment that decides to chase very high investment returns

Oliver Morley, Pension Protection Fund

PPF reserves fell 16 per cent to £5.1bn over 2019-20, according to the lifeboats most recent annual report.

“To some extent markets have recovered since [the annual report was published]. But it only takes two or three very significant claims to erode [reserves] almost entirely, and we have to be prepared for significant claims on the PPF,” he said.

Oliver Morley in conversation with Steve Webb from Lane Clark & Peacock on Vimeo.

He stressed that this would be of more concern than a large number of small schemes falling into the PPF.

Pensions Expert previously reported on the three-fold increase in the level of liabilities belonging to schemes that could end up in the PPF over the next 18 months. While not a prediction of the liabilities faced by the lifeboat, the measure does indicate deteriorating credit quality among the UK’s defined benefit sponsors. 

“Without a doubt, the large schemes will cause us more issues… in terms of absorbing them into the PPF, but also the impact on our claims and liabilities at that point,” Mr Morley said.

“Large numbers of small schemes are difficult to deal with from an administrative point of view. But they are not inherently the problem; the problem will be large schemes coming into us with significant deficits.”

Though he emphasised that the PPF remains “in a good place” despite recent market turbulence, Mr Morley was keen to illustrate how drastically the picture might change if just two or three large insolvency events occurred, making it important to think of the PPF’s accounting health as reserves, rather than a surplus.

When Sir Steve asked how a “surplus” might be spent, Mr Morley countered that thinking of reserves as an expendable surplus and speculating on what it might be spent on would be “rather like betting on the horses, and then spending the money before you have [won] it”.

Levy cut keeps options open

Sir Steve queried why, given the scenario outlined by Mr Morley in relation to insolvencies, the PPF is proposing to cut the levy. That proposal is currently the subject of a consultation, which closes on November 24. 

Mr Morley replied that there were a number of reasons for the proposed cut this year, one of which being that, given the volatility experienced this financial year, “we definitely want to delay the… triennial, multi-year approach on setting the levy, which would have been this year”.

This would lessen the burden on schemes during these particularly trying times. “We are proposing targeted measures, which means smaller schemes will see their levy halved,” he said, adding that this would also allow the PPF to reserve the right to increase it at a later date.

Superfunds increase risk

Fear of widespread insolvencies has led to a surge in interest for alternative options for affected schemes, with consolidators like superfunds attracting a lot of attention. Pensions Expert reported in July that as many as one in five schemes were considering superfunds as an option.

While acknowledging that superfunds have their place, Mr Morley said that the PPF remained cautious about how they are implemented.

“There are circumstances under which a superfund could absolutely be very desirable, and a well-run market for superfunds could be very successful,” he said.

But he added: “We at the PPF are concerned about increased risk, and… that is unavoidable in whatever policy framework you have unless you have a very strong regulatory environment for the covenant.”

The PPF has expressed “a very clear preference for buyout”, he continued, as “in the long run that will reduce risk considerably”.

Mr Morley continued: “I do understand arguments on the other side, but in the end we know that buyout would give the kind of security that the PPF would prefer… any increase in risk in our scheme universe is obviously something we are concerned about.”

He said ultimately, the strength of regulation surrounding superfunds will determine how sanguine the PPF is about their introduction.

“I will be very supportive of a well-run superfund; I will be extremely worried by one which is in a fairly freewheeling regulatory environment that decides to chase very high investment returns,” he added.