the occupational pensioners alliance 26 march 2008 pension protection fund where are we now
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The Occupational Pensioners’ Alliance 26 March 2008 Pension Protection Fund – Where Are We Now?. Peter Walker – Director of Delivery. CONTENTS. What were we set up to do? Are we doing it? How will we pay for it?. Introduction. What the PPF means:.

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the occupational pensioners alliance 26 march 2008 pension protection fund where are we now

The Occupational Pensioners’ Alliance26 March 2008Pension Protection Fund – Where Are We Now?

Peter Walker – Director of Delivery

contents
CONTENTS
  • What were we set up to do?
  • Are we doing it?
  • How will we pay for it?
what the ppf means
What the PPF means:

“Life is not fair. But there can be few crueller fates than that suffered by those who spend their entire career contributing to a company pension scheme only to find their retirement plans ruined by the business’s financial difficulties.”

Financial Times (October 2005)

“We were very lucky that the Pension Protection Fund has set up just before the collapse and we have the good news today that it will be taking over the payments to Rover pensioners. I now receive much more than I would have got if the PPF did not exist.”

MG Rover pensioner (March 2007)

introduction what is the pension protection fund
Introduction:What is the Pension Protection Fund?
  • Public Corporation run by a Board of Directors - derives its powers from, and set up by, the Pensions Act 2004
  • Sponsored by the Department for Work and Pensions
  • Accountable to Parliament through the Secretary of State for Work and Pensions
  • Pays compensation to members of eligible defined benefit and hybrid schemes which are underfunded and whose employers have experienced a qualifying insolvency event on or after 6 April 2005
balancing stakeholder issues
Balancing Stakeholder Issues

Affordability

Employers

Small,

predictable

levy

Funding,

Strong

employer

covenant

Trustees

Scheme

Members

PPF

Safe,

orderly

wind-up

Security

Short and

professional

wind-up

Security through

fully-funded

PPF

Government

Stability

introduction the current position of the ppf
Introduction:The current position of the PPF
  • 12 million DB scheme members protected by the PPF (Purple Book)
  • Over 50 schemes with over 20,000 members are expected to have completed assessment in the year to 31 March (and about 95 next year)
  • Over 200 schemes with 120,000 members currently in a PPF assessment period
  • Over £400m in s75 recoveries made from insolvent employers and paid into schemes
  • £5bn gross balance sheet total – growing fast
the db pensions system post april 2005 who does what
The DB Pensions System post April 2005: Who does what?
  • Responsible for:
  • Policy
  • Overseeing the organisations created by the Pensions Act 2004
  • Financial Assistance Scheme
  • to protect the benefits of members of work-based pension schemes
  • to promote good administration of work-based pension schemes
  • to reduce the risk of situations arising that may lead to claims for compensation from the PPF

To pay compensation to members of eligible pension schemes, which are underfunded, and where there has been a qualifying insolvency event

Independent non-profit organisation, funded by DWP, that provides free information, advice and guidance on the whole spectrum of pensions covering State, company, personal and stakeholder schemes.

The Pensions Ombudsman investigates and decides complaints and disputes about the way that pension schemes are run.

The PPF Ombudsman is the same person providing a similar role for the PPF

the db pensions system post april 2005 how the ppf works with other bodies
The DB Pensions System post April 2005: How the PPF works with other bodies
  • Close working relationship with the Pensions Regulator
      • Specific objective to protect the PPF
      • PPF has no regulatory role
      • Shared data collection via scheme returns
      • Improvements in scheme funding and governance will reduce risk to the PPF
      • Joint development of training (e.g. trustee toolkit)
  • Stewardship from DWP, avenue for legislation
  • Responsibility of trustees for schemes both ongoing and in assessment
who does the ppf protect the ppf universe the purple book and ppf 7800 index
Pensions Universe Risk Profile (PURPle Book) published annually by PPF and the Pensions Regulator

Tracks some 7,800 eligible DB pension schemes with some 12 million members

Highlights:

61% schemes closed to new members or new accruals

63% of members are in open schemes

35% of schemes are in the manufacturing sector (as against a 14% share of the economy)

PPF 7800 Index tracks the movement in scheme funding on a month by month basis on a PPF funding basis (buyout, mortality, discount rates)

Who does the PPF protect? The PPF Universe: The Purple Book and PPF 7800 Index

Estimated S179 Aggregate Balance

Total Assets Less Total Liabilities

150

100

50

0

£ billion

-50

-100

-150

-200

Jun-06

Jun-07

Jun-03

Jun-04

Jun-05

Dec-06

Dec-07

Dec-02

Dec-03

Dec-04

Dec-05

how do schemes enter the ppf overview of the assessment process

Rescue

Insolvency

Buyout

Enter

Assessment

Compensation

Rejection

Validation

Assessment

Transition

Compensation

How do schemes enter the PPF?Overview of the Assessment Process
validation

Rescue

Insolvency

Buyout

Enter

Assessment

Compensation

Rejection

Compensation

Validation

Assessment

Transition

Validation
  • Insolvency Practitioner required to notify PPF of any employer’s insolvency event where there is a pension scheme (Section 120 Notice)
  • Looking to automate most rejections during 2008
  • PPF will then assess whether the scheme is eligible for the PPF
    • Examples of ineligibility:
      • DC scheme
      • Commenced winding up prior to 6 April 2005
      • Actions by trustees prior to insolvency
assessment

Rescue

Insolvency

Buyout

Enter

Assessment

Compensation

Rejection

Compensation

Validation

Assessment

Transition

Assessment
  • Guide trustees on requirements of Pensions Act 2004: Trustees remain responsible for running scheme and continue to pay benefits at PPF levels
  • Agreement of a plan for:
      • Data Cleansing
      • Confirmation of Membership Data (NISPI etc.)
      • Production of a s143 valuation
  • Liaison with Insolvency Practitioner in creditor role to recover s75 debt for the pension scheme
  • Working with trustees to project-manage the scheme through assessment
transition

Rescue

Insolvency

Buyout

Enter

Assessment

Compensation

Rejection

Compensation

Validation

Assessment

Transition

Transition
  • Valuation of scheme carried out according to Section 143 of Pensions Act 2004
      • Valuation on a buyout basis
      • Consultation launched last month on assumptions used
  • Values assets and liabilities at insolvency date (including s75 recoveries)
  • Assesses whether scheme could secure benefits equal or higher than those provided by the PPFby buying out
compensation

Rescue

Insolvency

Buyout

Enter

Assessment

Compensation

Rejection

Compensation

Validation

Assessment

Transition

Compensation
  • If funded above PPF levels – Scheme buys out
      • Scheme must still seek to wind up
      • Trustees will seek to secure benefits above PPF levels
      • Benefits may still be below full levels (Priority order applies)
  • If funded below PPF levels – Scheme enters the PPF
      • Transfer of member data to Capita
      • Scheme assets transfer to PPF
      • PPF takes responsibility for ongoing and future payments
      • Remaining liabilities extinguished (AVCs, DC elements etc.)
      • Trustees are discharged
what the ppf pays compensation
What the PPF pays:Compensation
  • Compensation (not pension) is paid to members; not dependent on the assets that were in the scheme
  • Set by the Pensions Act 2004
  • Two levels of compensation
    • 100% compensation
    • 90% compensation (subject to a cap)
what the ppf pays compensation1
What the PPF pays:Compensation
  • 100% of their pension in payment at the assessment date is paid to:
      • Those over the scheme’s normal pension age at assessment date
      • Those under the NPA but receiving an ill health pension at the assessment date
      • Those receiving a survivor’s benefit
  • 90% of pension entitlement (subject to a cap) at the assessment date paid to:
      • Those who’ve not started drawing their pension at the assessment date
      • Those receiving a pension but below the pension scheme’s normal retirement age (but not an ill-health or survivor’s pension at the assessment date (i.e. early retirees)
  • Annual revaluation is applied to deferred entitlements and it is based on RPI capped at 5%
  • Annual indexation in payment is applied to post ‘97 service entitlements and it is based on RPI capped at 2.5%
how the ppf is funded
How the PPF is funded

Three sources of funding:

  • Investment returns
  • Taking in the remaining assets of pension schemes for which it assumes responsibility (including recoveries)
  • Raising an annual pension protection levy on all eligible defined benefit and hybrid schemes
how the ppf is funded ppf investment strategy

Cash - 20%

Global Bonds

Currency -

- 50%

2.5%

Property -

7.5%

Global

Equities -

UK Equities -

7.5%

12.5%

How the PPF is funded:PPF Investment Strategy
  • Bespoke
    • Unique nature of PPF
    • Both pension fund and insurer
    • Uncorrelated with schemes to which PPF exposed
  • Dynamic
    • Liability profile constantly evolving
  • Liability Driven
    • Context of compensation levels
    • Indexation changes liability over time
how the ppf is funded the levy and the long term risk model

Baseline scenarios

Distribution

issues

Investment/Risk

Solvency targets

Economic/

Behavioural

evidence

Risk

based

levy

Long Term Risk Model

Baseline and

alternative

scenarios

Scheme based

levy

Scheme data

How the PPF is funded:The levy and the Long Term Risk Model
how the ppf is funded the levy
How the PPF is funded:The levy
  • Overall levy quantum to be collected based on Long Term Risk Model; set by Board
      • £675m for 2007/08 and 2008/09; indexed to wages for next two years
  • Distribution between schemes based on risk:
    • Scheme based levy (20%)
      • Proportion of scheme liabilities
    • Risk based levy (80%)
      • Insolvency risk: probability of employer insolvency in next year
      • Underfunding risk: funding position of scheme on S179 basis
  • Levy structured to encourage risk reduction
    • Tapered reductions in levy payable for well funded schemes
    • Recognition of voluntary steps such as deficit reduction contributions and contingent assets
    • Levy cap limits annual levy payment for weaker schemes
how the ppf is funded developing the levy long term risk
How the PPF is funded:Developing the levy – long term risk

Short-term approach

Hybrid approach

Future development of the levy

05/6 06/7 07/8 08/9 09/10 10/11 11/12

Quantum

Basis

Distribution

Basis

Long Term Risk

Short-term risk

Long Term Risk

Short-term risk

Long Term Risk

Adapting 07/8 towards L/T basis

Long Term Risk

Review of 08/9 basis

LTRM &

Economic

Capital

LTRM &

Economic

Capital

Start-up

Fund

No. of

Members

Further consultation on approach to long term pricing

scheme investment risk
Scheme investment risk
  • The PPF has monitored the implications for risk
    • Consulted in 2007
    • Concluded time was not then right for inclusion as a risk factor
    • Committed to continuing to monitor the situation
  • Importance of scheme investment strategy for long term risk – both for modelling and pricing
  • KPMG on behalf of the PPF conducted a survey of a number of large UK pension schemes in December 2007
  • 95 pension schemes with approximate assets totalling £191bn responded
evidence from napf surveys
Evidence from NAPF surveys
  • 2006 NAPF Annual Survey
    • 17% DB schemes using an LDI strategy
    • 30% considering adopting LDI
    • 53% not using or not considering
    • Survey did not seek to define LDI
  • 2007 NAPF Annual Survey
    • Fall in equity share of total assets from 59.7%to 56.3%
    • Fixed income share to 29.4% from 27.7%
evidence from ppf survey
Evidence from PPF survey

45%

Percentage of liabilities

  • Many of the schemes estimate that only a small proportion of the scheme liabilities have been immunised/matched or hedged by investments in bonds (and/or derivative overlays)
  • Where a scheme hedges a large proportion of the liabilities, funding tends to be nearer to 100%. Where funding is significantly above or below 100%, the proportion of liabilities hedged is significantly lower

39%

40%

hedged

35%

30%

22.6%

25%

20%

14.4%

15%

10%

6.6%

6.2%

5%

2.6%

5%

1.8%

1.4%

0.5%

0%

0-10%

61-70%

71-80%

81-90%

11-20%

21-30%

51-60%

31-40%

41-50%

91-100%

evidence from ppf survey1
Evidence from PPF survey

Future plans on hedging interest rates and inflation

  • 38 schemes use swaps
    • Half of these allow their active bond manager the freedom to enter into swaps to better manage their portfolio
    • Only 12 of the 38 employ swaps to specifically hedge interest and inflation risks
  • Of the remaining 57, 28 schemes have formally considered the use of swaps in managing exposure to interest rates and inflation

None

Over next 10

years

Over next 5

years

Over next 3

years

Over next

year

None -

complete

0

20000

40000

60000

80000

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