When will the PPF fail?

FatherAbraham

Although the UK's "Pension Protection Fund" (PPF) is able to rescue pensioners and deferred member in the occasional defined-benefit scheme which fails, it clearly can never be big enough to deal with systemic changes, such as a dramatic increase in longevity, or permanent low returns on investments.  I suppose it just increases people's complacency, and encourages them to take risks which they oughtn't.
At what point will the PPF fail?  How much longer has it got?
Perhaps it never fails, because it slowly reduces what it offers, until it doesn't really offer anything at all -- and then can't become insolvent any more, because it's become voluntarily unwilling to pay anything.

dunstonh

At what point will the PPF fail?  How much longer has it got?

Why would it fail?

The aggregate deficit of the 5,422 non PPF DB schemes eligible to be considered by the PPF is £135bn compared to over £400bn in 2016. (Assets 1745.6bn vs 1874.1 liabilities).  The funding ratio increased from 92.5% to 93.1% to March 2020.

3503 schemes were in deficit and 1919 in surplus.

The PPF has been a massive success story and the scheme itself is in surplus 

hugheskevi

Of the nearly 10 million members in schemes paying PPF levy:

• 668,700 are accruing pension and are in schemes still open to new joiners
• 349,400 are accruing pension and are in schemes closed to new joiners
• 4,588,200 are deferred members
• 4,265,600 are pensioner members

This is as at 31st March 2020, so before most of the impacts arising from COVID.

The PPF is effectively overseeing a managed close-down of private sector DB schemes. In the long run, the number of active, deferred and pensioner members will be much smaller than it is now (perhaps around 2m, if no more DB schemes closed, which is unlikely). The numbers will decline as schemes buy-out with insurers, transfer-out members (possibly with incentivised transfers) and members and their survivors die.

If during the wind-down of DB pensions assumptions prove incorrect, the PPF can first choose to increase levies on schemes. This of course cannot be done without limit, but PPF sets levies so as to be self-sufficient by 2030 with no further levies required so there is flexibility.

If levy payments cannot be raised further, PPF compensation can be reduced - courts have ruled members must receive at least half the pension they would have received, but this still leaves quite a lot of scope to cut compensation.

If a point was ever reached where there was no scope to raise levies or cut compensation below 50%, then probably the govt would step in. But even in worst-case scenarios, that would not be for many years to come given current asset levels and actual cash flow required each year - the pot would not run dry for decades. Based on past experience, eg, with Royal Mail, in the worst-case scenario the PPF could be defunded and compensation paid out from govt. funding each year (so putting the PPF on the same basis as the Financial Assistance Scheme for schemes wound-up between 1997-2005) .

As at 31 March 2020, schemes were funded at an average 94.9% of PPF compensation levels, a shortfall of around £229 billion across all schemes in deficit. This shortfall fluctuates quite a lot, eg, a year earlier it was only about £160bn. The cost of fully insuring the pensions in private sector schemes is £2.37 trillion against assets of £1.7tr (ie complete de-risking).

JoeCrystal

Also, the PPF levy collected from the schemes at £567m last year is enough to cover 66% of the cost of paying out pensions to the PPF pensioners and the returns it made from the investments is sufficient to cover the rest as well.

Here is the annual report if you want further details: https://www.ppf.co.uk/sites/default/files/2020-10/PPF_AR_13102020.pdf

Frankly, I envied these DB scheme members who really have no worries at all...  

ewaste

As hugheskevi wisely noted it is effectively a run down of 'funded' defined benefit schemes as it consumes them. In my opinion it's not so much a case of the PPF being at risk but rather the risk it poses to any DB scheme that tries to survive. 

The cynic in me sees the eventual objective of removing all DB provison apart from possibly the state pension. You can't really make proper inroads into unfunded public pension schemes if there are still schemes out there in the wild. I somehow think hell will freeze over before the PPF levies or legislative efforts stop.

Marcon

FatherAbraham said:

Although the UK's "Pension Protection Fund" (PPF) is able to rescue pensioners and deferred member in the occasional defined-benefit scheme which fails, it clearly can never be big enough to deal with systemic changes, such as a dramatic increase in longevity, or permanent low returns on investments.  

We've already had both of these. 

FatherAbraham said:

I suppose it just increases people's complacency, and encourages them to take risks which they oughtn't.

In what way and by whom? Not sure you understand how recovery plans for DB schemes work and the role of the Regulator in approving them.

jamesd

Perhaps key to understanding why the PPF is unlikely to fail is the benefit cuts that are always made when a scheme enters the PPF:

1. 10% cut to those not yet retired

2. Inflation increases reduced to the legal minimums

Those are changes that over time reduce the scheme liabilities so that it is no longer in a negative position.

ErinGoBrath

jamesd said:

Perhaps key to understanding why the PPF is unlikely to fail is the benefit cuts that are always made when a scheme enters the PPF:

1. 10% cut to those not yet retired

2. Inflation increases reduced to the legal minimums

Those are changes that over time reduce the scheme liabilities so that it is no longer in a negative position.

I think you got point 1 slightly wrong. Anyone in receipt of their pension but have not reached scheme normal retirement age (i.e. early retirees) also get the 10% haircut.

SMcGill

I think you got point 1 slightly wrong. Anyone in receipt of their pension but have not reached scheme normal retirement age (i.e. early retirees) also get the 10% haircut.

What if the contracted retirement age was lower than scheme NRA? I suppose that’s not officially an early retiree?

ErinGoBrath

SMcGill said:

I think you got point 1 slightly wrong. Anyone in receipt of their pension but have not reached scheme normal retirement age (i.e. early retirees) also get the 10% haircut.

What if the contracted retirement age was lower than scheme NRA? I suppose that’s not officially an early retiree?

Good question. I suspect the scheme NRA prevails?