PPF levies "likely to rise" if fund is to remain self-sufficient, chief executive says

Alan Rubenstein was speaking as the Pension Protection Fund (PPF) published its accounts and annual report (120-page / 2.9MB PDF) for the past financial year. The report showed a "robust" 25% rate of return on the PPF's investments, which it described as "more than sufficient" to offset its increasing liabilities.

However, the "challenging environment" for pension schemes as a whole has impacted on the PPF's long-term funding strategy (27-page / 396KB PDF), Rubenstein said. The probability that the PPF will meet its objective of becoming financially self-sufficient by 2030 fell from 87% to 84% over the past year, he said.

"Although this figure is still above our comfort level, we remain ever vigilant about events which will reduce this probability even further," he said. "Foremost in our minds has been the continuing global financial crisis and the adverse effect it has had on the funding positions of UK pension schemes. Increased claims on the PPF have already meant that our own funding level has fallen from 106% in March 2012 to about 102% and that levies are likely to rise in the short-term."

The pension protection levy is paid by eligible defined benefit pension schemes, which are schemes that promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. It is used to fund compensation paid by the PPF to people whose employers have become insolvent, meaning they can no longer afford to pay the pensions they promised.

The PPF announced last month that UK businesses will be asked to contribute an estimated £630 million over the next financial year. The proposed figure is the same as the ultimate contribution made by businesses for 2012-13; however, it is £80m more than what the PPF originally estimated that businesses would pay over the same period.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said at the time that the estimate reflected a "pragmatic approach" by the PPF. However he pointed out that future levies would have to "remain credible", which could mean future rises as the risks and liabilities attached to defined benefit schemes increased. Although the combined deficit of the nearly 6,500 schemes tracked by the PPF in its monthly PPF 7800 Index fell again in September, the figure currently stands at an estimated £229.1 billion.

According to its annual report, the PPF had a £1.07 billion surplus over liabilities as of the end of March 2012. It currently manages assets worth £11.1bn and looks after the interests of over 128,000 savers. Its performance was largely down to its "robust" investment hedging strategy, it said.

Lady Barbara Judge, chair of the PPF, said that the fund remained "in good shape" to face future challenges despite difficult economic conditions.

"Our overall performance should give our members continued confidence in our commitment to provide their retirement compensation for as long as they need it," she said. "We cannot rest on our laurels, however. Already this year, we have seen claims on the PPF of more than £700m – and a significant deterioration in the deficits of many of the other pension schemes that we protect. We are determined, however, that the PPF should remain strong enough to weather these storms."