It has been just over six months since Arnold Wagner was appointed chairman of the £23bn Pension Protection Fund. He talks to Helen Morrissey about the key lessons learned during 2016 and how the fund is looking to the future
The last 12 months have been particularly turbulent for defined benefit (DB) schemes with the financial woes of Tata Steel and British Home Stores (BHS) making pensions front page news. As DB deficits grow and firms face challenging trading conditions there has been much discussion on the potential impact on The Pension Protection Fund (PPF) and whether it can deal with future calls on its resources.
While many people would shy away from such issues Arnold Wagner took up the position of chairman of the lifeboat fund in July 2016. His key responsibility is to support the executive team and the PPF's strategy going forward - a challenge he clearly relishes.
"I am impressed with how the PPF manages to do the day-to-day stuff - how the investment strategy is run, legal issues, the assessment work we do, serving members' needs etc. In addition to this there is a genuine attempt to understand how our universe might change in the future. It strikes a good balance between what we are doing now versus preparing for what may happen in the future."
Wagner believes in what he calls the PPF's "noble mission" of striking a balance between giving reassurance to DB members while also looking at how levy payers are treated in terms of what they pay and how they are engaged with.
"No-one would look at the system we had before the PPF was set up and say they would want to return to it," he says. "I think that is an important issue to realise."
While the problems experienced by BHS have given the PPF a higher profile Wagner believes it provides an important opportunity to reassure and educate members and the wider public on the role of the lifeboat fund.
"Stepping up our communications work is all about providing more reassurance and security to people about what we do as well as giving a sense of protection to the people we cover," he says. "The PPF is not a sales and marketing organisation trying to grow our assets and revenues, and I think it is really important that what is said and written about us is correct. It is entirely right and proper that we are questioned and challenged but we need to make sure an accurate message is getting out there in terms of what we do, and why we are doing it."
The cases of BHS and Tata Steel have thrown up many issues about how distressed sponsors with sizeable DB deficits should be dealt with. Identifying potential problems early is all important in ensuring the long term health of DB schemes and minimising future calls on the PPF.
The potential for giving the Pensions Regulator (TPR) more powers to deal with distressed sponsors early on is something endorsed by many in the industry including the PPF.
"We believe TPR should have stronger anti-avoidance powers. It is of course an issue that has been well discussed but it is also very important to realise that the system is not broken. There are some stressed schemes out there and this needs to be addressed," says Wagner. "But we also need to take a good look at deficit recovery periods. If a scheme has a very long deficit recovery plan then surely that is telling us something. We have made it clear that we don't think these recovery plans should be any more than ten years."
Wagner also believes more time needs to be given to looking at instances where deficits could potentially be paid off quicker than recovery plans state.
"There is recent evidence that the amount of money being paid out in dividends is substantially greater than what is being paid into pension schemes," he says. "It is not for us to say what a company should do but it is fair to challenge whether the balance is right. That balance is something for each company board to decide but it should perhaps also be discussed with scheme trustees."
Another issue that has emerged is how to deal with schemes running on without a sponsoring employer. This is a situation not envisioned in the 2004 legislation that set up the PPF and according to Wagner constitutes "a one-way bet against" the lifeboat fund and its levy payers.
"We are looking at this closely in terms of how such an arrangement should be structured and how we raise a levy for such schemes that is a sustainable basis for assessing the risk each scheme represents to the PPF," he says. "For instance, if these schemes were to get into difficulty and go into default then at what point would you trigger a wind up? You can't allow such schemes to continue to run on indefinitely and potentially accumulate a massive deficit. We need to deal with this situation in a way that is fair to everyone including our existing levy payers."
In its decade of existence the PPF has garnered much praise for its investment approach. Assets under management currently stand at around £23bn and the fund remains on course to achieve self-sufficiency by 2030.
However, concerns remain about the number of employers potentially teetering on the precipice of insolvency. Pensions Institute figures say there are currently around 600 pension schemes at serious risk of entering the PPF, with another 400 hovering on the edge. Is this something the PPF is prepared and able to deal with?
"We spend a lot of time as an organisation going through analysis based on a million different economic scenarios so we don't take anything for granted," says Wagner. "You can never say something won't happen but for all of the scenarios we look at, such a situation would be at the tail-end of probabilities. If something like that were to happen and we were to face £40bn-£50bn worth of liabilities falling on us then that would be because, for example, several large companies have become insolvent. If that were the case then the country would be facing an extremely serious situation in which what is happening to the PPF would be an important but not the main story. However, we are never complacent and we continue to question the models that we use on a regular basis and adapt them when appropriate."
As it stands the PPF is seen as being a major success story in safeguarding the benefits of DB members. Are there any plans for the PPF to take on a wider remit?
"What we do is laid down by an act of Parliament and we are certainly not short of work," says Wagner. "It has changed a lot since 2005 - for instance we have seen the emergence of a more sensitive and structured levy. We consult widely on this and we would be surprised and disappointed if people did not think that that a worthwhile exercise. We have also insourced our member services so we have more direct interaction with the people who receive compensation from us - this is all part of providing them with reassurance about the security of their benefits. This team is made up of very experienced people and they know how to provide a good service to members.
"We are also in the process of insourcing some of our investment capability, using the substantial talents of our in-house team to greatest effect. We are doing this at a pace that we can absorb - taking the time to do it right and not rushing things. Doing this will help make us more efficient and gives us the capability to make decisions more effectively."
However, Wagner continues saying that if called on, the PPF would look to take on extra responsibilities while focusing on its key mission of protecting DB members.
"We have grown and developed over the years and if government asked us to take on further responsibilities then we would, of course, respond positively. However, we will always be focused on protecting and reassuring the members of DB schemes and ensure our levy payers are treated fairly - nothing changes from that point of view. We will wait and see what is in the upcoming Green Paper and do what is necessary to deliver efficiently and effectively on our mission."
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