The Pension Protection Fund's Hans den Boer says why the PPF cannot be not complacent despite its healthy funding position.
Financially, the year 2016-17 saw a further reduction in yields on both conventional and index-linked Gilts, impacting the funding levels of the schemes we protect.
Sponsors of DB schemes have continued making substantial deficit reduction contributions, but overall the total deficit in the universe of schemes the PPF protects finished the financial year almost where it started 12 months previously.
The total deficit in the universe of schemes the PPF protects finished the financial year almost where it started 12 months previously
The PPF 7800 Index identified a record low in scheme funding in August 2016 when the aggregate deficit reached £413.1bn, although there has been a general improvement in the index since then, with the aggregate deficit estimated at £186.2bn on an section 179 basis at the end of June 2017.
The PPF is currently in a healthy financial position. As published in our latest annual report and accounts, invested assets are up from £23.4bn to £28.7bn and as a result of good investment performance and lower than expected claims, our funding ratio has increased to 121.6 per cent, up from 116.3 per cent last year.
We have a clear understanding of what our potential liabilities are and we use this to inform our funding strategy, which guides our financial decisions to ensure we meet our funding objective, to have a prudent margin (10 per cent) on our funding ratio at our funding horizon, when future claims are expected to be low relative to our size, and therefore pose less risk to us.
A million scenarios tested
Each year we update the funding strategy to include the latest financial information, and consider the risks to this objective.
A key element of reviewing the funding strategy is long-term risk modelling. Our long-term risk model runs through one million scenarios to test the likelihood of the PPF meeting its funding objective. In addition, we perform a range of stress tests to analyse the possible impact on the PPF.
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The probability of achieving self-sufficiency by the funding horizon has remained unchanged at 93 per cent. In the remaining 7 per cent of scenarios we would end up at less than 110 per cent funded by our funding horizon.
For this reason we are not complacent; these scenarios indicate that we have to maintain a careful approach in order to act in the best interest of our levy payers and members.
While our balance sheet is strong, we need to remain vigilant to the risks that the universe of DB schemes presents to us. It is important we continue to monitor this through the PPF 7800 Index, and that our modelling and stress testing remains appropriate to make sure we are in the best financial position to pay compensation to current and future members for as long as they need us.
Hans den Boer is chief risk officer at the Pension Protection Fund
