(June 21, 2013) — The Pension Protection Fund (PPF), the UK’s lifeboat fund for the pensions of insolvent corporates, is looking to adopt a third way of grouping its investments to allow for greater exposure to illiquid assets.
Speaking to aiCIO at the Institute and Faculty of Actuaries’ Risk and Investment conference in Brighton, UK, chief risk officer Martin Clarke said the PPF wanted to move away from its current binary grouping of assets.
Under the existing arrangement, the assets are arranged into either liability driven investment hedging assets, which seek to offset interest rate and inflation risk, or return-seeking assets in a diversified growth setup.
“We’ve identified ourselves that there’s an appetite for having more illiquid investments, based on the argument that in many cases the illiquidity risk is rewarded,” Clarke said.
“We’d still only want a limited exposure to it, as we’d need to maintain a mark-to-market stability though.”
As part of that desire, the PPF wants to implement a third block of assets, sitting between the hedging ones and the return-seeking ones, which effectively do both.
“We’ve got some assets already which have the characteristics of both, but we’re only looking at them from the one perspective,” he added.
Clarke also maintained that it would take “one of the large schemes to fall out of the sky” to cause any sort of serious dent in the PPF’s liabilities, which currently enjoy a coverage ratio of 105%, up from around 88% when the PPF started in 2004.
“Last November we commissioned what was then called Oxford Economics to produce an outlook on what would happen if a euro crisis was in place, and the results were surprisingly mild,” he added.
During his presentation to the Institute’s members, Clarke mentioned the PPF had benefitted from a certain amount of luck in its journey to solvency. If one of the major banks not been bailed out by the taxpayer and had fallen into the PPF, it would have looked very different, he told the audience.
Speaking to aiCIO afterwards, he mused that there appeared to be more enthusiasm from all parties to try and keep larger schemes out of the PPF in recent months.
“There’s a willingness for people to think of imaginative solutions today,” he said, and referencing what happened to the Kodak pension scheme, he continued: “What transpired was something that gave us better protection and saw the members share in the pain, but with the prospect of their benefits being greater than if they’d come into the PPF.”
In April, the UK arm of the Kodak pension fund was given control of parts of the business involved in areas such as the photo kiosks, speciality photo services and scanners, in return for releasing the parent company and its affiliations from $2.8 billion worth of pensions claims in court.
A new scheme was subsequently launched by the UK trustees, providing less generous benefits. The deal prevented the UK scheme from falling into the PPF.
The Pensions Regulator in the UK has been given a new objective in the past few months by the government to consider the impact of demanding further contributions on the fund sponsor.
Asked whether he believed similar deals would be reached in future with other faltering pension funds, Clarke said: “With the pensions regulator it remains to be seen in practice how it manages to keep equilibrium between its four objectives… we’ll just have to wait and see what happens.”
Clarke was ranked as one of last year’s Power 100–you can read more about his time at the PPF here.
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