How the PPF manages risk

On the one hand, the PPF resembles a regular defined benefit pension scheme, with obligations to hundreds of thousands of people, stretching many decades into the future.

On the other hand, we stand behind several thousands of schemes with millions of members who will want to have confidence that we are there to protect them. Both our members and levy payers are central to our strategy and we must ensure they are not put at unnecessary risk.

While our funding position remains strong in relation to our compensation liabilities, the risks to the PPF are real

One of our three strategic objectives is to pursue our mission within a high calibre framework of risk management. This risk framework provides the structure for all our work in assessing and managing our risks.

Broadly, we identify three categories of risk: operational, funding and strategic. We have processes in place to deal with them effectively.

One important process is our risk and control self-assessment, where the risk team works with other PPF teams to identify the risks, assess their potential impact and determine if the controls are sufficient to mitigate them effectively. We also monitor external risks, such as the funding levels in the universe of schemes we protect, through our PPF 7800 and the annual Purple Book publication.

Our board has set a funding objective to be self-sufficient at the time of our funding horizon when future claims are expected to be small relative to the size of the PPF.

We track progress towards achieving the objective through our long-term risk model, where we bring together its most important drivers: economic developments in the coming years; the claims we could encounter; the levy we charge; and the investment returns we may achieve on our pool of assets.

We also publish an annual update on our funding strategy, where more information can be found.

Investment and liability risk

Our board sets the level of our risk appetite for investment and liability risk, which allows it to balance the needs of levy payers and members.

A more risky investment strategy may mean that the average levy to be paid could be lower if the strategy is successful, but it would also mean a greater downside if it was unsuccessful, which would be detrimental to both levy payers and members.

The PPF targets a long-term investment return of 1.8 per cent a year in excess of our liabilities, with an associated investment risk appetite equivalent to a tracking error between 3.5 per cent and 5 per cent a year (again, against the liabilities).

A key component of our strategy is an active liability-driven investment portfolio, with the aim to substantially hedge the sensitivity of our liabilities to market moves in interest rates and inflation. 

These liability hedges make up about 40 per cent of our strategic asset allocation, with the remainder invested in a wide variety of return-seeking assets, such as global and emerging market bonds, liquid equity and several types of alternatives. We also invest in so-called ‘hybrid’ assets that have both return-seeking and hedging characteristics.

In addition to the tracking error, several other measures of risk play an important role in managing the risks of our investments; we use sensitivities to measure the effect of small market changes to the value of our assets, as well as tail-risk measures such as value at risk and stress tests to see the impact of large market changes.

Looking ahead

While our funding position remains strong in relation to our compensation liabilities, the risks to the PPF are real. Significant deficits persist in the universe of schemes that we insure, and the average recovery plan length has not reduced materially over the past decade. Unfortunately, insolvencies continue to happen and we remain vigilant to potential claims.

At the PPF, we understand these risks in our universe and our robust strategy has put us in a good position to manage the uncertainties ahead, reflecting our dedication to the millions of members we protect.

Hans den Boer is chief risk officer of the PPF