The Pension Protection Fund has updated its risk assessment on future claims to a worst-case scenario of £25bn by 2030, up from £22.5bn at last year’s reckoning.
The calculations, included in the pensions lifeboat’s Purple Book 2020, published on Wednesday, have worsened when compared with 2019 due to the current pandemic-led economic crisis.
“Over the next year, we expect both higher numbers of claims because sponsors are less robust and higher claim amounts, as the market disruption has increased the size of scheme deficits,” the report read.
Every year, the PPF models the level of future claims, which it categorises as “the biggest risk we face and… one we cannot control”.
At the moment, our funding strategy is doing what it is supposed to do and we are in a very good position for what comes next
Lisa McCrory, Pensions Protection Fund
There are favourable scenarios in which the lifeboat would receive fairly small claim volumes — with the median outcome reaching almost £14bn by 2030 — but there is a substantial risk that the PPF would have to take on board a multitude of schemes, with the worst outcome being cumulative claims of £25bn in 10 years’ time.
In 2019, these figures were projected at £12.7bn and £22.5bn, respectively.
PPF ready for more claims
Arcadia might be one of the new claims that the lifeboat will include in future reports, as the retail empire entered administration on Monday, triggering a PPF assessment period for the group’s two defined benefit schemes, with 10,000 members.
Since then, it has been reported by the FT that Tina Green, the wife of retail tycoon Philip Green, will pay in the next 10 days a final £50m promised to its pension fund. The payment was due in September 2021 as part of an agreement struck with the Pensions Regulator and the trustees last year.
The scheme will still be assessed the PPF, but it is not expected to have a big impact on the lifeboat, according to Lisa McCrory, PPF’s chief finance officer and chief actuary.
In a webinar organised by Pensions Expert on Wednesday, she explained that the PPF is in the process of collating information on the schemes, but it is “not expecting it to be one of the big claims we have received in the past”.
Ms McCrory said: “It is a large scheme, but it is well within the capacities of the PPF to absorb.”
She explained that the lifeboat’s modelling includes an expectation that there will “be periods of time when we see higher claims”.
“That has happened in the past, we have had periods of high claims before, and you would expect it to be cyclical with the economic cycle.
“What is more difficult to tell in advance is what size those claims are going to be when they arrive, which is why we have our modelling so we can understand the range of outcomes and what actions we would need to take to ensure our sustainability,” Ms McCrory continued.
“At the moment, our funding strategy is doing what it is supposed to do and we are in a very good position for what comes next.”
According to the Purple Book 2020, 41 new schemes entered PPF assessment in the current fiscal year. This figure is higher than the 26 new schemes in the previous year, but is similar to the levels observed between 2014 and 2018, the report read.
However, the total value of claims in 2020 was £0.5bn, measured on a Section 179 basis, much lower than 2019’s record claims of £1.9bn when there was a very large claim from the Kodak Pension Plan No. 2.
Underfunded DB schemes’ deficit rises £69bn
Figures published in the Purple Book revealed that the number of underfunded schemes increased to 63 per cent of schemes, which had an aggregate deficit of £229bn at March 31 2020. This compares with £160bn in 2019.
The aggregate funding ratio decreased over the year from 99 per cent to 95 per cent, primarily due to market movements, the PPF stated.
The number of schemes eligible for the lifeboat has dropped from 5,436 to 5,327 pension funds, a reflection of schemes winding up, scheme mergers and those which entered PPF assessment.
The proportion of schemes open to new members remained at 11 per cent, while the number of pension funds closed to new members but open to new benefit accrual has dropped from 44 to 41 per cent.
Adrian Kennett, a professional trustee at Dalriada Trustees, noted that the report showed broad trends have continued, such as a reduction in active membership and an increase in derisking strategies, such as moving from equities to bonds.
PPF reserves could be ‘wiped out’ by one or two big claims
Pension Protection Fund chief executive Oliver Morley has warned that the lifeboat’s reserves could be wiped out by just a few large claims, while downplaying the risk of a post-Covid run of small-scheme claims.
In terms of funding, the fact that the effective date is March 31 2020 is key, he said.
“Funding levels were down at that point — if the data was cut today it would show a different story,” Mr Kennett continued.
“But that different story of funding improvement would mask scheme-specific challenges, particularly as we have seen in recent days in sectors such as retail.”
