The PPF – our great escape!

lifeboat

We get used to talking about the failure of the private sector to deliver proper pension outcomes.

We are incensed by the shortcomings in governance that has allowed well funded local government schemes to feed the City’s insatiable need for fees.

But when we get a public pension scheme that gets it right and uses private sector fund management for the good of members, the body pension and the taxpayer, we fall silent.

So what’s the PPF?

The PPF started on 6 April 2005 in response to public concern that when employers sponsoring defined benefit pension schemes became insolvent, scheme members could lose some or all of their pension if the scheme was underfunded. Besides offering compensation to those pension scheme members affected by insolvencies the Government hoped that the existence of the PPF would improve confidence in pension schemes generally

The PPF pays two levels of compensation:

  • Any member who is over their normal retirement age or who retired early due to ill health will receive 100% of the pension they are currently receiving.
  • Other members will receive the 90% level of compensation capped at a certain level. For the year from 1 April 2011, the cap is £33,219.36 per annum for members at age 65. From 2013, the cap will also increase by 3% for each year of service over 20 years.

The PPF also offers a dependent’s pension of half the member’s entitlement

How’s the Pension Protection Fund doing?

The PPF doesn’t do PR – it tells you how it is and asks you to draw your own conclusions

It’s most recent statement on funding the levy it imposes on surviving pension schemes has been well received.

In its disclosures to the public it is a model of simplicity

• The aggregate deficit of the 6,057 schemes in the PPF 7800 index is estimated to have increased over the month to £221.1 billion at the end of November 2014, from a deficit of £164.9 billion at the end of October 2014.

• The funding ratio decreased from 87.9 per cent to 84.8 per cent.

• Total assets were £1,232.9 billion and total liabilities were £1,454.0 billion.

• There were 4,781 schemes in deficit and 1,276 schemes in surplus.

This may look like bad news, but in the context of the movements of gilt rates (which impact on liabilities as much as equity returns impact on asset valuations), these numbers have been well received.

The transparency of PPF’s approach both to asset/liability management and to the state of the fund has given reassurance to those within the fund and to those advising on it.

And here’s the American comparison

President Barack Obama on Tuesday signed into law legislation that will allow trustees of financially distressed multi-employer pension plans to cut participants’ benefits to prevent the plans from becoming insolvent.

The multi-employer pension provisions are part of a huge $1.1 trillion spending bill — H.R. 83 — that received congressional approval last week.

Under the new law, benefits can be cut if a plan is projected to become insolvent during a current plan year or any of the next 14 years, or any of the next 19 years if the plan’s ratio of inactive participants to active participants exceeds 2-to-1 or if the plan is less than 80% funded.

Participants would have to be given the right to vote on cuts before the benefit reductions could be implemented. However, even if participants rejected the cuts, if a plan is “systemically important” — meaning that it poses a very large risk to the Pension Benefit Guaranty Corp., the federal agency that guarantees participant benefits — the U.S. Treasury Department could override the vote, permitting implementation of a benefits suspension plan.

Certain participants will be shielded from benefit cuts, including retirees age 80 and older and those receiving disability benefits under the plan. Retirees between ages 75 and 79 will face smaller benefit cuts than retirees under age 75.

In addition, benefits cannot be reduced to less than 110% of the benefit guaranteed by the PBGC. Currently, the maximum annual benefit guaranteed by the PBGC to participants in multi-employer plans is $13,000 for a participant with 30 years of service.

Effective next year, the legislation also doubles the premiums multi-employer pension plans pay the PBGC to $26 per participant. The current premium is $12 per plan participant, and had been scheduled to rise to $13 per participant prior to the new law.

(Thanks to Per Andelius for this)

We could sum up more succinctly; “The American equivalent is in a mess”.


It is to the great credit of the successive Governments, the pension industry and most of all to the civil servants who set up and now run the PPF, that we have a safety net that is working.

There are lessons for us to learn.

  1. By common consent, the PPF is working because it has clear targets; it has a timetable to be self sufficient and is bringing down the levy intelligently (read this article by Spence’s Alan Collins). They have created a plan and stuck to it
  2. The PPF is working by converting failing private schemes into a successful private/public partnership. Surely there is a lesson for the tPR as it contemplates the wasteland of derelict DC schemes it regulates.
  3. The structure of the PPF, a Regulatory Own Fund is working well. It admits the assets and liabilities  of failing schemes in a well-defined and orderly way. It is the only model we have of a collective pension scheme that does not require a sponsoring employer. The PPF is a case study for those considering how we can make CDC work (without employer support).

 

So hats off to the PPF, one of the parts of our pension system that is working well. As we look to 2015 and beyond, we should be looking at the success of the PPF.

 

If you’ve got this far- you deserve some light relief, here is a great little video of Jerry-baiting British wit by way of some festive light relief!

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to The PPF – our great escape!

  1. Nick Foster says:

    Henry all the things that the Americans are doing could happen in the UK if the PPF’s assumptions are only slightly different from reality. George Osborne is set on a smaller state which means that the PPF WILL DEFINITELY NOT BE BAILED OUT if the projections they make prove to be wildly optimistic. So, based on the PPF’s own time horizon up to 2030, I think it is a little premature to be congratulating them.

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