The Occupational Pensioners’ Alliance
26 March 2008
Pension Protection Fund – Where Are We Now?
Peter Walker – Director of Delivery
CONTENTS
• What were we set up to do?
• Are we doing it?
• How will we pay for it?
Introduction
What the PPF means:
“Life is not fair. But there can be few crueller fates than that
suffered by those who spend their entire career contributing to a
company pension scheme only to find their retirement plans
ruined by the business’s financial difficulties.”
Financial Times (October 2005)
“We were very lucky that the Pension Protection Fund has set up
just before the collapse and we have the good news today that it
will be taking over the payments to Rover pensioners. I now
receive much more than I would have got if the PPF did not
exist.”
MG Rover pensioner (March 2007)
Introduction:
What is the Pension Protection Fund?
• Public Corporation run by a Board of Directors - derives its
powers from, and set up by, the Pensions Act 2004
• Sponsored by the Department for Work and Pensions
• Accountable to Parliament through the Secretary of State
for Work and Pensions
• Pays compensation to members of eligible defined benefit
and hybrid schemes which are underfunded and whose
employers have experienced a qualifying insolvency event
on or after 6 April 2005
Balancing Stakeholder Issues
Affordability
Small,
predictable
levy
Trustees
Safe,
orderly
wind-up
Employers
Funding,
Strong
employer
covenant
Scheme
Members
PPF
Short and
professional
wind-up
Security through
fully-funded
PPF
Government
Stability
Security
Introduction:
The current position of the PPF
• 12 million DB scheme members protected by the
PPF (Purple Book)
• Over 50 schemes with over 20,000 members are
expected to have completed assessment in the
year to 31 March (and about 95 next year)
• Over 200 schemes with 120,000 members
currently in a PPF assessment period
• Over £400m in s75 recoveries made from
insolvent employers and paid into schemes
• £5bn gross balance sheet total – growing fast
The DB Pensions System post April 2005:
Who does what?
Responsible for:
• Policy
• Overseeing the organisations created by the Pensions Act 2004
• Financial Assistance Scheme
• to protect the benefits
To pay
compensation to
members of
eligible pension
schemes, which
are underfunded,
and where there
has been a
qualifying
insolvency event
of members of workbased pension
schemes
• to promote good
administration of workbased pension
schemes
• to reduce the risk of
situations arising that
may lead to claims for
compensation from the
PPF
Independent non-profit
organisation, funded by
DWP, that provides
free information, advice
and guidance on the
whole spectrum of
pensions covering
State, company,
personal and
stakeholder schemes.
The Pensions
Ombudsman
investigates and
decides complaints and
disputes about the way
that pension schemes
are run.
The PPF Ombudsman
is the same person
providing a similar role
for the PPF
The DB Pensions System post April 2005:
How the PPF works with other bodies
• Close working relationship with the Pensions
Regulator
•
•
•
•
Specific objective to protect the PPF
PPF has no regulatory role
Shared data collection via scheme returns
Improvements in scheme funding and governance will
reduce risk to the PPF
• Joint development of training (e.g. trustee toolkit)
• Stewardship from DWP, avenue for legislation
• Responsibility of trustees for schemes both ongoing
and in assessment
Who does the PPF protect?
The PPF Universe: The Purple Book and PPF
7800 Index
•
Estimated S179 Aggregate Balance
Total Assets Less Total Liabilities
150
•
100
•
0
–
-50
–
–
-100
-150
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
-200
Dec-02
£ billion
50
Pensions Universe Risk Profile
(PURPle Book) published
annually by PPF and the
Pensions Regulator
Tracks some 7,800 eligible DB
pension schemes with some 12
million members
Highlights:
•
61% schemes closed to new members or
new accruals
63% of members are in open schemes
35% of schemes are in the manufacturing
sector (as against a 14% share of the
economy)
PPF 7800 Index tracks the
movement in scheme funding on
a month by month basis on a PPF
funding basis (buyout, mortality,
discount rates)
How do schemes enter the PPF?
Overview of the Assessment Process
Rescue
Insolvency
Enter
Assessment
Validation
Compensation
Rejection
Assessment
Buyout
Transition
Compensation
Validation
Rescue
Insolvency
Buyout
Enter
Assessment
Compensation
Rejection
Validation
Assessment
Transition
Compensation
• Insolvency Practitioner required to notify PPF of
any employer’s insolvency event where there is a
pension scheme (Section 120 Notice)
• Looking to automate most rejections during 2008
• PPF will then assess whether the scheme is
eligible for the PPF
– Examples of ineligibility:
• DC scheme
• Commenced winding up prior to 6 April 2005
• Actions by trustees prior to insolvency
Volumes of s120 notices received
Assessment
Rescue
Insolvency
Buyout
Enter
Assessment
Compensation
Rejection
Validation
Assessment
Transition
Compensation
• Guide trustees on requirements of Pensions Act 2004:
Trustees remain responsible for running scheme and
continue to pay benefits at PPF levels
• Agreement of a plan for:
• Data Cleansing
• Confirmation of Membership Data (NISPI etc.)
• Production of a s143 valuation
• Liaison with Insolvency Practitioner in creditor role to
recover s75 debt for the pension scheme
• Working with trustees to project-manage the scheme
through assessment
Transition
Rescue
Insolvency
Buyout
Enter
Assessment
Compensation
Rejection
Validation
Assessment
Transition
Compensation
• Valuation of scheme carried out according to
Section 143 of Pensions Act 2004
• Valuation on a buyout basis
• Consultation launched last month on assumptions used
• Values assets and liabilities at insolvency date
(including s75 recoveries)
• Assesses whether scheme could secure benefits
equal or higher than those provided by the PPF
by buying out
Compensation
Rescue
Insolvency
Buyout
Enter
Assessment
Compensation
Rejection
Validation
Assessment
Transition
Compensation
• If funded above PPF levels – Scheme buys out
• Scheme must still seek to wind up
• Trustees will seek to secure benefits above PPF levels
• Benefits may still be below full levels (Priority order applies)
• If funded below PPF levels – Scheme enters the PPF
•
•
•
•
•
Transfer of member data to Capita
Scheme assets transfer to PPF
PPF takes responsibility for ongoing and future payments
Remaining liabilities extinguished (AVCs, DC elements etc.)
Trustees are discharged
Forecast of transfers into PPF including
current year rescues
Section transfers into PPF
350
325
300
275
250
200
2 years from receipt
175
150
Validated
125
Received
100
75
50
less optimistic forecast
25
Target
0
Ap
r-0
5
Ju
n05
Au
g05
O
ct05
De
c05
Fe
b06
Ap
r-0
6
Ju
n06
Au
g06
O
ct06
De
c06
Fe
b07
Ap
r-0
7
Ju
n07
Au
g07
O
ct07
De
c07
Fe
b08
Ap
r-0
8
Ju
n08
Au
g08
O
ct08
De
c08
Fe
b09
Ap
r-0
9
Ju
n09
Au
g09
O
ct09
De
c09
Fe
b10
Sections
225
What the PPF pays:
Compensation
• Compensation (not pension) is paid to
members; not dependent on the assets that
were in the scheme
• Set by the Pensions Act 2004
• Two levels of compensation
– 100% compensation
– 90% compensation (subject to a cap)
What the PPF pays:
Compensation
• 100% of their pension in payment at the assessment date is paid to:
• Those over the scheme’s normal pension age at assessment date
• Those under the NPA but receiving an ill health pension at the assessment
date
• Those receiving a survivor’s benefit
• 90% of pension entitlement (subject to a cap) at the assessment
date paid to:
• Those who’ve not started drawing their pension at the assessment date
• Those receiving a pension but below the pension scheme’s normal
retirement age (but not an ill-health or survivor’s pension at the assessment
date (i.e. early retirees)
•
•
Annual revaluation is applied to deferred entitlements and it is based on
RPI capped at 5%
Annual indexation in payment is applied to post ‘97 service entitlements and
it is based on RPI capped at 2.5%
How the PPF is funded
Three sources of funding:
• Investment returns
• Taking in the remaining assets of pension
schemes for which it assumes responsibility
(including recoveries)
• Raising an annual pension protection levy on all
eligible defined benefit and hybrid schemes
How the PPF is funded:
PPF Investment Strategy
• Bespoke
Cash - 20%
Currency 2.5%
Global Bonds
- 50%
Property 7.5%
Global
Equities - UK Equities 7.5%
12.5%
– Unique nature of PPF
– Both pension fund and
insurer
– Uncorrelated with schemes
to which PPF exposed
• Dynamic
– Liability profile constantly
evolving
• Liability Driven
– Context of compensation
levels
– Indexation changes liability
over time
How the PPF is funded:
The levy and the Long Term Risk Model
Scheme data
Baseline scenarios
Economic/
Behavioural
evidence
Investment/Risk
Solvency targets
Long Term
Risk Model
Distribution
issues
Baseline and
alternative
scenarios
Risk
based
levy
Scheme
based
levy
How the PPF is funded:
The levy
• Overall levy quantum to be collected based on Long Term
Risk Model; set by Board
• £675m for 2007/08 and 2008/09; indexed to wages for next two years
• Distribution between schemes based on risk:
– Scheme based levy (20%)
• Proportion of scheme liabilities
– Risk based levy (80%)
• Insolvency risk: probability of employer insolvency in next year
• Underfunding risk: funding position of scheme on S179 basis
• Levy structured to encourage risk reduction
– Tapered reductions in levy payable for well funded schemes
– Recognition of voluntary steps such as deficit reduction contributions and
contingent assets
– Levy cap limits annual levy payment for weaker schemes
How the PPF is funded:
Developing the levy – long term risk
Short-term approach
05/6
Hybrid approach
06/7
Future development of the levy
07/8
08/9
09/10
10/11
11/12
Quantum
Basis
Start-up
Fund
Long Term
Risk
Long Term
Risk
Long Term
Risk
Long Term
Risk
LTRM &
Economic
Capital
Distribution
Basis
No. of
Members
Short-term
risk
Short-term
risk
Adapting
07/8 towards
L/T basis
Review of
08/9 basis
Further consultation on
approach to long term pricing
LTRM &
Economic
Capital
Scheme investment risk
• The PPF has monitored the implications for
risk
– Consulted in 2007
– Concluded time was not then right for inclusion as a risk factor
– Committed to continuing to monitor the situation
• Importance of scheme investment strategy for
long term risk – both for modelling and pricing
• KPMG on behalf of the PPF conducted a
survey of a number of large UK pension
schemes in December 2007
• 95 pension schemes with approximate assets
totalling £191bn responded
Evidence from NAPF surveys
• 2006 NAPF Annual Survey
–
–
–
–
17% DB schemes using an LDI strategy
30% considering adopting LDI
53% not using or not considering
Survey did not seek to define LDI
• 2007 NAPF Annual Survey
– Fall in equity share of total assets from 59.7%
to 56.3%
– Fixed income share to 29.4% from 27.7%
Evidence from PPF survey
40%
Percentage of liabilities
hedged
39%
35%
30%
22.6%
25%
20%
14.4%
15%
10%
6.6%
6.2%
5%
2.6%
1.4%
5%
1.8%
0.5%
91-100%
81-90%
71-80%
61-70%
51-60%
41-50%
31-40%
21-30%
0%
11-20%
• Where a scheme hedges a
large proportion of the
liabilities, funding tends to be
nearer to 100%. Where funding
is significantly above or below
100%, the proportion of
liabilities hedged is
significantly lower
45%
0-10%
• Many of the schemes estimate
that only a small proportion of
the scheme liabilities have
been immunised/matched or
hedged by investments in
bonds (and/or derivative
overlays)
Evidence from PPF survey
• 38 schemes use swaps
– Half of these allow their active bond
manager the freedom to enter into
swaps to better manage their
portfolio
– Only 12 of the 38 employ swaps to
specifically hedge interest and
inflation risks
• Of the remaining 57, 28
schemes have formally
considered the use of swaps
in managing exposure to
interest rates and inflation
Future plans on hedging interest
rates and inflation
None
Over next 10
years
Over next 5
years
Over next 3
years
Over next
year
None complete
0
20000
40000
60000
80000
Any questions?
Pension Protection Fund – Where Are We Now?
Peter Walker – Director of Delivery