The Pension Protection Fund (PPF) is likely to face a “multi-billion pound hit” from the increased number of company insolvencies due to the impact of Covid-19, according to LCP.

Despite this, the consultancy predicted that the pensions lifeboat would be able to withstand the “all but the deepest crisis” without resorting to cutting benefits due to the flexibilities in its funding structure.

LCP’s report - The PPF and Covid-19 – Can the lifeboat sail to calmer waters? - noted that the PPF is better at weathering a larger number of small schemes entering it than a smaller number of schemes with large deficits.

It analysed the impact of the 2008 financial crisis on the PPF and found that, in the six years after the crash, there were an average of over 100 new claims each year with an aggregate hit on the PPF’s deficit of £3.7bn.

However, in the five years from 2013/14, although the number of claims fell to around 50 per year, the impact was approximately £4.5bn.

This was primarily driven by one large scheme, Kodak Pension Plan No. 2, entering the PPF and accounting for around a third of the total.

“This demonstrates that it is not the total number of insolvencies which is key, but rather the extent to which those insolvencies are concentrated amongst firms with larger deficits,” noted LCP.

LCP warned that the largest risk to the PPF would come if the pandemic affected firms that have relatively large defined benefit (DB) deficits, and the lifeboat could face a hit of over £20bn.

However, even if the worse scenario of a £20bn hit did become reality, LCP said that a combination of adjustments to the PPF’s funding strategy and self-sufficiency targets could be enough to weather the impact without needing to cut benefits.

PPF executive director, David Taylor, commented: “Our members, levy payers and those protected by the PPF should not be concerned with speculation about our ability to weather the current economic situation.

"Our latest modelling shows that we are well placed to achieve our self-sufficiency target and our 2020/21 levy estimate remains unchanged from its announcement last year.”

Commenting on the report, LCP partner, Jonathan Wolff, said: “The PPF has provided valuable peace of mind for DB pension scheme members for more than fifteen years, and it is reassuring to see that this ‘lifeboat’ is relatively well placed to navigate the current choppy waters.

“The PPF has a range of levers it can pull to absorb increased cost pressures without having to resort to cutting benefits to members. But we cannot be complacent.

“Recent history has been a reminder that the crucial question is whether the insolvencies which we are likely to see in the coming years will hit firms which also have large DB deficits. There remains a risk that too many such insolvencies could put a serious strain on the system”.

LCP noted that the PPF would likely take a £10bn hit if there were a similar level of insolvencies as the 2008 financial crisis, while a £20bn impact represents a “deeper downturn” where PPF claims are focused on companies with larger deficits.

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