Is the pension protection scheme weathering the storm?

Apparently so, according to the Pension Protection Fund (PPF), which is also responsible for the Financial Assistance Scheme. Good news for troubled pension schemes and their members, independent trustees who must  undertake PPF assessment & FAS assessment and other pension-industry watchers.

Although PPF chief executive Alan Rubenstein describes the economic climate of the past couple of years as “challenging”, the PPF had sailed through troubled waters relatively smoothly.

Figures published for the financial year 2009/2010 show the PPF with a surplus of £400m as a result of strong investment returns and a reduction in claims by pension schemes eligible for PPF. Results for the last financial year, which have yet to be published, are expected to show further improvements.

In an upbeat, state-of-play assessment, Mr Rubenstein says, “The past two years have seen challenging times for the economy at large, as well as for the pensions industry more specifically. Financial crises, subdued growth, turmoil in the bond markets - we are all familiar with the story and the underlying causes.“But far from being tossed about on stormy financial seas and at risk of foundering on the rocks of rising insolvencies, the Pension Protection Fund has sailed through these troubled waters relatively smoothly.”

But Mr Rubenstein did sound a note of caution. He warned that the PPF's strong funding position was not something that could be taken for granted.

He said, “In an ever changing world, we need to understand our risks and plan our future funding, so that we can give everyone - members, levy payers and government - confidence that we will be around to pay the vital compensation we provide, not just for next year, or even the next ten years, but as long as we are needed.

That is why the funding strategy that we published last year is so important. This strategy charts a course over the next 19 years, as the risks we face evolve, toward a future in which the PPF can expect to be self-sufficient. That will mean a future in which the levy ceases to be a significant source of income for the fund, with our success or failure increasingly depending on our ability to manage our investments and risks together.”

In the meantime, said Mr Rubenstein, the levy would continue to be an important component of PPF resources. It was right that the way it was raised should be consistent with the PPF's approach to its funding strategy. However, the design of the levy also needed to be a better match with the expectations of stakeholders.

Mr Rubenstein added, “Our changes to the levy from 2012/13 aim to combine these two requirements and the responses that we received to our consultation on our proposals indicated we were on the right track. There was strong support for the broad thrust of our proposals, with stakeholders viewing them as a significant improvement on the current levy framework.

A key change from 2012/13 will be that we will aim to set the rules for the levy for a three year period, rather than changing the way the levy is calculated every year. A scheme’s levy will still vary depending on movements in its risk, which is appropriate, although we are also making changes to smooth the assessment of risks which should help make bills more stable and predictable. Together with the stronger emphasis on scheme funding in the new formula, we believe this gives schemes more control over the levers that influence their levy.”

The PPF raises some of its funding through the pension protection levy. The levy helps towards the compensation payable to members of schemes that transfer to the PPF. All UK defined benefit (final salary) pension schemes eligible for PPF compensation pay the pension protection levy.