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.

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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.

"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


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