Press Release - Department For Work and
Pensions: Pension Protection Fund
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.
Mr Amyas Morse, head of the National Audit Office, said
today:
"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."
Notes for Editors
- The Pension Protection Fund, which is overseen by the
Department for Work and Pensions, was established by the Pensions
Act 2004. It provides compensation to members of UK private sector
defined benefit (commonly known as final salary) pension schemes
where an employer is insolvent and the scheme itself has
insufficient funds to pay more than the Pension Protection Fund
will pay in compensation.
- The Fund protects some 12.4 million pensions in around 7,100
pension schemes. In December 2009 the Fund was paying £7 million a
month to approximately 15,000 pensioners and the Fund is
responsible for the future pensions of another 18,000 people who
have yet to retire.
- At the end of March 2009 the present value of the Fund’s
current existing liabilities, which fall due over 100 years, were
£1.7 billion.
- The “swaps”, which contributed to the Fund’s increase in
investment value by 13.4 per cent in 2008-09 are financial deals to
adjust the cash flow profile from the Fund’s assets so that they
match the cash flow profile of the Fund’s liabilities. The Fund
operates a combination of interest rate and inflation swaps so that
the cashflows from its assets can keep pace with the impact of
inflation and interest rate changes on the value of its
liabilities.
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
- The Comptroller and Auditor General, Amyas Morse, is the head
of the National Audit Office which employs some 900 staff. He and
the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 08/10
All enquiries to Sarah
Farndale, NAO Press Office:
Tel: 020 7798 5350
Mobile: 07985 274421