"The Pension Protection Fund has done well to retain a
healthy balance sheet in trying economic times. However, it is
likely that the challenge facing the Fund will increase as more
schemes are transferred to it. Therefore it should continue to take
appropriate steps to manage the increasing value of its assets
efficiently and continue to work at improving its ability to assess
the risks that it faces in periods of economic
difficulty."
Amyas Morse, head of the National Audit Office, 5 February
2010
The Pension Protection Fund, which protects private sector
pensions, has delivered value for money in terms of investing
efficiently and preparing adequately for the potential impact of
future claims, a National Audit Office report says today. The Fund
must take steps to ensure that it continues to deliver value for
money in the future, particularly as its assets increase as more
schemes transfer to the Fund.
The Pension Protection Fund offers protection to some 12.4
million pensioners in private sector defined benefit (often known
as final salary) pension schemes should their employer become
insolvent. The NAO found that the Fund currently manages its assets
well and has not been exposed to severe losses in the recession. In
2008-09, the Fund’s investments, in aggregate, increased in value
by 13.4 per cent.
The Fund’s standard investments, not including financial deals
known as swaps, saw a return of minus 3.4 per cent in 2008-09 and
this compares well with the market average for the same combination
of asset classes which was a return of minus 3.6 per cent. But, as
the Fund’s assets grow, the investment operation will require
additional skills and the Fund should consider adapting its
investment processes.
The Fund's deficit increased during the recession - from £517
million in March 2008 to £1.2 billion in March 2009 - largely
because of the combined deficit of the increased number of schemes
being assessed on whether they should be transferred to the Fund.
However, the value of the Fund’s assets far outweighs its annual
compensation payments: at the end of March 2009 its assets were
£3.2 billion but its current compensation payments amount to £70
million a year.
The Fund has developed a suitable model to assess future
liabilities and this has proved resilient to a range of stress
tests. However, the model’s longer-term projections are sensitive
to important assumptions. The Fund should, therefore, establish a
framework for illustrating the sensitivity of output from its
long-term risk model.
Publication details:
HC: 293, 2009-10
ISBN: 9780102963465