Inflation is one of a number of concerns for the Pension Protection Fund, with post-Covid uncertainty tempering reaction to an otherwise positive set of results released in its annual report published on Monday.
As reported by Pensions Expert, the PPF paid out £1bn in member compensation in 2020-21. Strong investment performance coupled with risk management saw much of the impact of the Covid-19 pandemic mitigated, as the lifeboat’s funding position increased by 13.9 per cent to 127.3 per cent.
Its reserves likewise increased to £9bn, having fallen as low as £5.1bn at the height of the pandemic.
The PPF’s strong performance carried over into its investments, with assets under management growing from £36bn to £38bn, and its growth assets up by £3.7bn, or 17.6 per cent, which the report said was the largest return on this investment portfolio to date.
Clearly, there could be very major changes in the market that mean that what we consider to be very careful accumulation of reserves won’t be absolutely the right approach in the future
Oliver Morley, PPF
The lifeboat fund’s probability of success, measured against its target of being self-sufficient by 2030, rose from 83 per cent in 2020 to 95 per cent in 2021, while the levy collected increased from £567m to £630m, despite the two-month interest-free payment extension offered to help alleviate the pandemic’s pressure on levy payers.
Inflation and uncertainty
Speaking in a Pensions Expert podcast, PPF chief executive Oliver Morley said that the good performance does not completely mitigate the risks borne by lingering Covid-induced uncertainty, though the lifeboat is “in a good position to meet future claims over the longer term”.
“Although the situation for schemes more generally is improving, I don’t think any one of us would be able to say definitively that the position on surpluses and deficits across all defined benefit pension schemes will always improve,” he said.
“Clearly, there could be very major changes in the market that mean that what we consider to be very careful accumulation of reserves won’t be absolutely the right approach in the future.”
He added that the PPF will have to “pay particular attention” to inflation.
“Just as it was quite difficult to predict what would happen with furlough and things like that, in terms of the impact on our universe, I think it is true that inflation could add a level of volatility that makes it quite difficult to tell exactly what will happen over the coming year,” Morley said.
The most recent inflation figures, published on Wednesday, showed the consumer price index had dropped slightly, from 3.2 per cent in August to 3.1 per cent in September, though it remains well above the Bank of England’s target of 2 per cent.
The decline also defied a trend that some still expect will see inflation reach 4 per cent by the end of the year.
Loan facility on track
Morley said that plans to allow the Fraud Compensation Fund to take out a loan to cover claims that exceed its assets are progressing on schedule.
Following a court ruling in 2020 that scam schemes were eligible to make claims on the FCF, nine claims totalling £40m were received, with more expected following confirmation of eligibility criteria.
The PPF is “aware of” an additional 117 possible claims with a potential value in excess of £358m, but the FCF itself only has assets totalling £33.9m.
In April 2021, the FCF levy was raised to the maximum allowed by law of 75p per member and 30p for master trust members.
However, the report noted that “this levy alone would not be sufficient to fund all potential claims, should they crystallise, so we have been working with the [Department for Work and Pensions] to resolve the funding gap by securing a loan from the DWP to the FCF”.
Lisa McCrory, the PPF’s chief finance officer and chief actuary, told Pensions Expert that it is unlikely any claims will come through that exceed the FCF’s ability to pay out before the loan facility is in place.
“We’re monitoring the cash flows pretty carefully, as you would imagine. The first couple of cases that are working through, we have more than enough money to settle those,” she said.
“Over this financial year we’ll be receiving additional levy income, which will help go towards those schemes. So we’re very confident that we’ll have the money that we need in place for when we need to settle those applications.”
Lost £950,000 was recovered
PPF pays out £1bn but fraud compensation claims raise concerns
The Pension Protection Fund paid out £1bn in member compensation in 2020-21, but there are concerns as potential claims with a value in excess of £358m against its Fraud Compensation Fund vastly exceed the money available to pay them, according to the PPF’s annual report.
The PPF’s annual report also showed that £950,000 was lost, attributed to an error “in the process of constructing the liability hedging requirement”.
“We always aim to be as transparent as possible as part of our reporting,” McCrory said.
“That represented a very short period where we had some inaccurate market pricing on billions of pounds of assets. The problem was spotted pretty quickly, as part of our internal reviews, and rectified. And then the money was obviously made back pretty quickly after that, given the overall performance of the fund.”
