05/2/2010
By Sophie Baker
The Pension Protection Fund (PPF) must ensure that it continues to provide value for money when it comes to investment, especially as more schemes are transferring into its lifeboat, says the National Audit Office (NAO).
A report by the Office says that, while the PPF has managed its assets well and has not been exposed to severe losses in the recession, it must establish a framework for illustrating the sensitivity of output of a long-term risk model (LTRM) it has developed. The model has been developed to assess future liabilities and has, the NAO said, proved resilient to a range of stress tests, and its longer term projections are sensitive to important assumptions.
The NAO report states: “Stakeholders continue to suggest that the workings of the Model are not transparent. Major levy payers argue that the Fund should provide more detailed information on the operation of the Model, in particular the methodology for deriving insolvency risk over five years” on page 22 of the report. It also recommends that the Board “consider further consultation on the operation of the Model to make it more accessible to employers paying the levy” (page 8 of the report).
Amyas Morse, head of the NAO, said: “The Pension Protection Fund has done well to retain a healthy balance sheet in trying economic times. However, it is likely that the challenge facing the Fund will increase as more schemes are transferred to it. Therefore it should continue to take appropriate steps to manage the increasing value of its assets efficiently and continue to work at improving its ability to assess the risks that it faces in periods of economic difficulty.”
Towers Watson, however, picked up on the NAO drawing attention to employers’ unhappiness about the lack of transparency surrounding the model which the PPF uses to assess the risks they pose.
Rash Bhabra, Towers Watson, said: “At the height of the recession, the PPF thought it could be staring down the barrel of a gun. Any perception that it had a lucky escape could make it even more determined to build up a war chest to protect against future shocks. But before it tries to amass a surplus, the PPF should say how unneeded funds would eventually be returned to employers if things do not turn out so badly. If levies include a premium to prepare for the worst, the PPF should view this as a ‘loan’ from employers which would not be repaid only if things go wrong, rather than a donation.”
Bhabra also reiterated the NAO’s concerns on the transparency and explanations of its levy payments: “Like the taxman, the PPF does not have to convince everyone that their levies are fair, but should at least allow them to understand how these bills are worked out and why theirs might be going up.”
The NAO found that the PPF’s investments increased, in aggregate, by 13.4 per cent in 2008/09, and standard investments not including swaps returned -3.4 per cent the same year. This, the NAO said, compared well with the market average for the same combination of asset classes, which saw a -3.6 per cent return. The deficit for the Fund increased from £517 million in March 2008 to £1.2bn in March 2009, which the NAO attributed to the combined deficit of the increased number of schemes being assessed on their suitability for transfer into the Fund. However, the Fund’s assets value outweighed its annual compensation payments, at £3.2bn assets at the end of March 2009, and current compensation payments of £70 million a year.
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