The Pension Protection Fund (PPF) has an 83% probability of success for its target of being self-sufficient by 2030 as of March this year, a six percentage point drop from 2019.
In its annual report and accounts for 2019/20, published today (8 October), the lifeboat fund said the likelihood of meeting its objective - to be 110% funded by 2030 - had fallen for a third successive year. It is now at its joint lowest ever level, equivalent to the 83% figure in March 2010, which is also the first year the PPF calculated the figure.
The initial market falls of February and March this year are also observable, with the lifeboat fund's overall funding ratio falling by 5.2 percentage points to 113.4% over the year to March 2020. It is the second year in a row that the funding level has fallen, and the lowest funding ratio since 2013/14.
Meanwhile its reserves also plummeted by £1bn to £5.1bn - a 16% drop that the compensation scheme blamed on the impact of the market on its return-seeking assets. In 2018/19, the PPF had seen a £0.6bn, or 9%, fall in its reserves, largely as a result of £1.7bn of claims. In the past year, just £0.3bn of claims were made by 36 schemes.
Actuarial liabilities also soared by 24% to £28.7bn, largely as a result of new claims and revaluation, while £0.2bn has been estimated for the potential removal of the compensation cap as a result of a recent judicial ruling on its impermissibility for age discrimination, which is being appealed.
Nevertheless, investment returns held up well, sticking at the 5.2% figure the PPF had also reported in 2018/19, and its total assets under management grew by £4bn to £36.1bn. The lifeboat fund said it was "well protected" by its hedging strategy, with its liability-driven investment approach mitigating changes in inflation and interest rates.
Chief finance officer Lisa McCrory said: "Our strategy is built to withstand periodic market shocks. Our long-term, low-risk investment approach and our hedging programme performed as intended, protecting the PPF and limiting the impact of market turbulence.
"While our reserves decreased year-on-year, we've seen a good recovery in the current financial year. We expect the macroeconomic situation to be tough for the foreseeable future, but we're confident in our ability to protect all current and future members."
The latest report and accounts only cover the early stages of the coronavirus pandemic and its immediate impact on markets and the economy.
The last six months have seen a raft of interventions by the government and the Bank of England to artificially support the economy and halt any rapid growth in insolvencies.
However, some of these are now beginning to unwind, including the Coronavirus Job Retention Scheme and the Retail, Hospitality and Leisure Grant Fund, raising the possibility of new insolvencies and further claims on the PPF.
The PPF also noted that a 5% fall in the value of its growth assets could deduct around £900m from reserves, while currently "highly likely" claims on the PPF could reduce this further by £527.3m. Meanwhile, a one-year change in the average life expectancy of members could decrease or increase reserves by £1.4bn.
It also predicted a potential £600m impact from the proposed reforms to the Retail Prices Index, if this is aligned to the housing cost-based version of the Consumer Prices Index (CPIH) in 2030.
PPF chief executive Oliver Morley recognised the lifeboat fund had to be cognisant of the ongoing uncertainty and potential for future difficulties.
"We will never be complacent but the PPF has coped well throughout the Covid-19 crisis. Our operations were uninterrupted, we maintained high levels of customer satisfaction, and we made very good progress on our strategic plan."
Late last month, the PPF proposed cutting its levy collection forecast to its lowest level since 2006/07 in order to help schemes and sponsors weather the storm of Covid-19. Around 2,000 small schemes are expected to benefit from the tapered approach to the risk-based levy.
Lane Clark & Peacock (LCP) in August said that large schemes were likely to test the PPF's sustainability, with potential hits to the PPF ranging between £10bn and £20bn depending on the rate of insolvencies and the size of the claims.
However, it recognised that reducing the probability of success was a lever the PPF could pull to absorb a larger portion of liabilities without increasing the levy.
Responding today, LCP partner Jonathan Wolff said: "This report is a reminder that the PPF has multiple levers to pull when times get tough. They have clearly decided not to let the levy take the strain.
"Instead they are prepared to live with a significantly reduced probability of reaching their long-term funding target. Much of this deterioration is driven by an expectation of increased claims arising from the economic impact of the Covid-19 pandemic. It seems likely that they are assuming over £1bn of additional claims in this regard.
"Something else which will not help the PPF is the change to the RPI measure of inflation. This change alone could cost the PPF more than £600m in reserves if it were to happen in 2030, and more if the Treasury opted for 2025 implementation."
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