25 August 2010

The Financial Times has reported that the Pension Protection Fund (PPF), the body that stands behind the retirement promises of insolvent employers, will unveil plans to generate enough cash to pay all future benefits.

The PPF, which was established in 2005 after a series of high-profile pension schemes collapsed, is funded by employers who pay a fee based on the risk of default of their own scheme. The income comes from the PPF's investment returns on those levies and from the assets held by the schemes that it takes over.

There have been fears that by 2030 the number of employers with a defined benefit scheme could be very small. This would mean their levies paid annually to the fund would be disproportionately large.

Alan Rubenstein, the PPF’s chief executive, said that as part of the new long-term funding strategy, the fund planned to have enough cash available to pay all future benefits by 2030.

“There is the idea that one day there will only be one or two large schemes in the UK and they will have to pay the levy for everybody,” said Mr Rubenstein. “As the levy shrinks, we want to demonstrate that we have a plan in place to be able to pay benefits to all claimants.”

The PPF’s funding strategy is based on the assumption that the Pensions Regulator tells employers to continue to fully fund their pension promises even if their schemes close, and to reduce risks through the use of hedging instruments. To make the PPF self-sufficient would require employers to pay levies in the years ahead, which “may ratchet up or down” as the target date approaches.

The PPF says it has an 83 per cent chance of hitting its target of 110 per cent of required cash by 2030, at which time it will hold an investment portfolio with zero risk.

The PPF has grown rapidly since its inception, with assets of £4bn as of March 31 2010, up from £1.45bn two years earlier. So far, 150 underfunded pension schemes have been transferred into the PPF and it is insuring benefits for 46,000 members.