The Pension Protection Fund’s (PPF) probability of success of being at least 110 per cent funded by 2030 fell from 89 per cent to 83 per cent year-on-year, as of 31 March 2020, its annual report has revealed.

This represents its lowest probability of success since March 2010, when it was also recorded at 83 per cent.

The PPF’s funding ratio declined by 5.2 percentage points to 113.4 per cent due to the market turmoil in the weeks preceding 31 March 2020.

Its report also revealed the pensions lifeboat’s reserves fell by £1bn over the year, to £5.1bn, while the benefits it paid out increased by £85m to £860m.

Assets under management increased by £4bn to £36.1bn, although its actuarial liabilities also rose, by £5.6bn to £28.7bn.

The PPF’s investment return remained steady at 5.2 per cent, while the amount of levy it collected increased by £6m to £567m.

Commenting on the report, PPF chief finance officer, Lisa McCrory, said “Our strategy is built to withstand periodic market shocks. Our long-term, low-risk investment approach and our hedging programme performed as intended, protecting the PPF and limiting the impact of market turbulence.

“While our reserves decreased year-on-year, we’ve seen a good recovery in the current financial year. We expect the macroeconomic situation to be tough for the foreseeable future but we’re confident in our ability to protect all current and future members.”

LCP partner, Jon Wolff, stated that the report was a reminder that the PPF “has multiple levers to pull when times get tough”.

“They have clearly decided not to let the levy take the strain,” Wolff continued. “Instead they are prepared to live with a significantly reduced probability of reaching their long-term funding target.

“Much of this deterioration is driven by an expectation of increased claims arising from the economic impact of the Covid-19 pandemic. It seems likely that they are assuming over £1bn of additional claims in this regard."

Wolff also warned that the plan to align the Retail Price Index (RPI) with the Consumer Price Index including owner occupiers’ housing costs (CPIH) would "not help" the PPF.

“This change alone could cost the PPF more than £600m in reserves if it were to happen in 2030, and more if the Treasury opted for 2025 implementation,” he said.

Willis Towers Watson Retirement Practice director, Joanne Shepard, added: “The fall in the PPF’s funding level over the year to 31 March, from 118 per cent to 113 per cent, is much smaller than that experienced by many pension schemes.

"More worrying for the PPF will be the prospect of new claims as new economic realities catch up with more companies – it’s unsurprising that Oliver Morley says this risk will be the PPF’s focus. There is a lot of uncertainty about the scale of these future claims – not just how many companies become insolvent, but which companies and how big their pension deficits are.

“A worse outlook for insolvency is the biggest single contributor to the fall in the PPF’s estimate of how likely it is to be 110 per cent funded by 2030, which has come down from 89 per cent to a 83 per cent - still a high number, not one to instil panic. If this were to fall further, one challenge for the PPF is that even big hikes in levies only make a small difference – even if these are deemed affordable."

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