The Pension Protection Fund has updated its risk assessment on future claims to a worst-case scenario of £25bn by 2030, up from £22.5bn in the previous year.
The calculations, included in the pensions lifeboat Purple Book 2020, published yesterday (December 2), have worsened when compared with 2019 due to the pandemic-led economic crisis.
“Over the next year, we currently expect both higher numbers of claims because sponsors are less robust and higher claim amounts as the market disruption has increased the size of scheme deficits,” the report read.
Every year, the PPF models the level of future claims, which is “the biggest risk we face and is one we cannot control,” it stated.
There are favourable scenarios in which the lifeboat would receive fairly small claim volumes — with the median outcome reaching almost £14bn by 2030 — but there is a substantial risk that the PPF would have to take on board a multitude of schemes, with the worst outcome being cumulative claims of £25bn in 10 years’ time.
In 2019, these figures were projected at £12.7bn and £22.5bn, respectively.
PPF ready for more claims
Arcadia might be one of the new claims that the lifeboat will include in future reports, as the retail empire entered into administration on Monday, triggering an assessment period at the PPF for its two defined benefit schemes, with some 10,000 members.
Lisa McCrory, PPF’s chief finance officer and chief actuary, is not expecting such development to have a big impact on the lifeboat scheme.
In a webinar organised by FTAdviser's sister publication Pensions Expert on Wednesday, she explained the PPF is currently in the process of collating information on the schemes, but it is “not expecting it to be one of the big claims we have received in the past”.
Ms McCrory said: “It is a large scheme, but it is well within the capacities of the PPF to absorb.”
She explained the lifeboat modelling includes an expectation that there will “be periods of time when we see higher claims”.
“That has happened in the past, we have had periods of high claims before, and you would expect it to be cyclical with the economic cycle.
“What is more difficult to tell in advance is what size those claims are going to be when they arrive, which is why we have our modelling so we can understand the range of outcomes and what actions we would need to take to ensure our sustainability.
“At the moment, our funding strategy is doing what it is supposed to do and we are in a very good position for what comes next.”
According to the Purple Book 2020, 41 new schemes entered PPF assessment in the 2020 fiscal year.
The figure is higher than in the previous year, when it was 26 schemes, but it is similar to the levels observed between 2014 and 2018, the report read.
However, the total value of claims in 2020 was £0.5bn, measured on an s179 basis, which is much lower than last year’s record claims of £1.9bn when there was a very large claim from the Kodak Pension Plan No. 2, the PPF stated.
DB deficit hikes £69bn
Figures published in the Purple Book revealed that the number of underfunded schemes increased to 63 per cent of schemes, which had an aggregate deficit of £229bn at 31 March 2020. This compares to £160bn in 2019.
The aggregate funding ratio decreased over the year from 99 per cent to 95 per cent, primarily due to market movements, the PPF stated.
The number of schemes eligible for the PPF has dropped from 5,436 to 5,327 pension funds, a reflection of schemes winding up, scheme mergers and those which entered PPF assessment.
The proportion of schemes open to new members remained at 11 per cent, while the number of pensions funds closed to new members but open to new benefit accrual has dropped from 44 to 41 per cent.
Adrian Kennett, a professional trustee at Dalriada Trustees, noted the report showed broad trends have continued, such as a reduction in active membership and an increase of de-risking strategies, such as moving from equities to bonds.
In terms of funding, the fact the effective date is March 31, 2020 is key, he said.
“Funding levels were down at that point - if the data was cut today it would show a different story.
“But that different story of funding improvement would mask scheme-specific challenges, particularly as we have seen in recent days in sectors such as retail.”
maria.espadinha@ft.com
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