UK - The Pension Protection Fund faces ‘systemic failure' if it invests significantly in equities, the National Association of Pension Funds warns.
Its policy paper says that as the PPF has no government guarantee, the fund’s objectives should primarily focus on risk reduction to provide security for compensation payment.
The paper noted: “If the fund invests significantly in UK equities, the emergence of weak economic conditions will cause those assets to decline in value, at precisely the same time that pension funds and their sponsoring employers are in greatest difficulty.
“These conditions will cause greater exposure and greater claims for the PPF. The risks of a systemic failure are obvious.”
But the NAPF warned that this increased security for the fund would come at a price and that pension scheme levies would have to be higher or the level of protected benefits under the scheme would have to be reduced.
The NAPF also suggested that, as most of the assets that the PPF would receive would be in the form of equities, the fund should implement a strategy to protect against the possibility of downward movement in prices before scheme assets were transferred.
NAPF strategic adviser and its PPF advisory group leader John Wigley said: “The PPF is essentially providing insurance to schemes and its investment policy should take account of its insurance responsibilities rather than it being invested like a pension fund.”
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