Financial Management of the UK Pension Protection Fund

Abstract

The UK Pension Protection Fund (PPF) was established in April 2005 to protect the pensions of members of UK private sector defined benefit pension schemes which have insufficient assets and whose corporate sponsor fails. The Fund takes over the pension scheme assets and assumes responsibility for the payment of compensation to the former members of the scheme. The PPF is funded by a levy on the population of eligible schemes. This paper discusses the application of Enterprise Risk Management principles and techniques to the unique situation of the PPF. The elements of the financial management of the Fund have been developed by reference to practice within proprietary insurance institutions and within pension funds. The paper will be of interest and, we hope, of some value to students, researchers and analysts and also to the PPF's own stakeholder groups that have a stake in an effective pension protection regime.

Role of the Pension Protection Fund in financial risk management of UK defined benefit pension sector: a multi-period economic capital study

“…As mentioned in Charmaille et al (2013), there are also a number of other countries, namely Germany, Sweden, Switzerland, Finland and the United States, who run similar pension protection regimes. In particular, Pension Benefit Guarantee Corporation (PBGC) of the United States formed in 1974, which is very similar to PPF, has seen very large claims in the recent years.…”

“…Charmaille et al (2013) provided a detailed discussion of the qualitative and quantitative financial risk management of PPF. The authors calculate a success probability of 87% for PPF’s stated objective of being “self-sufficient” by the year 2030, with a maximum deficit of £7 billion at 90th percentile level.…”

Actuarial valuations to monitor defined benefit pension funding

“…One arises from the absence of assets with maturity terms over 50 years, also considered by Cowling et al (2012), who discussed possible ways of dealing with this. Second is the lack of CPI-indexed assets, an issue which the PPF monitors in its management reporting (Charmaille et al, 2013).…”

“…Hatchett et al (2013) suggested that, in the UK context, readers might think of risk-free assets as gilts or suitably well-collateralised swaps with a sufficiently reliable counterparty. Charmaille et al (2013) regarded the normal position to be for swap rates to exceed gilt yields, although this could be reversed in certain circumstances; Foroughi (2012) put forward possible explanations for negative swap spreads at medium to long durations. The PPF's liabilities are referenced to the higher of gilt yields and swap rates.…”

“…There are two areas where the gilt/swap approach needs adaptation, being areas of basis risk referred to by Charmaille et al (2013). One arises from the absence of assets with maturity terms over 50 years, also considered by Cowling et al (2012), who discussed possible ways of dealing with this.…”