The head of the National Audit Office (NAO) has warned that the Pension Protection Fund (PPF) will face increasing challenges as more schemes are transferred to it.
Amyas Morse, head of the NAO, said that although the PPF has done well to retain a healthy balance sheet in trying economic times it should take extra measures when it came to assessing risk.
He said: “It [the PPF] should continue to take appropriate steps to manage the increasing value of its assets efficiently and continue to work at improving its ability to assess the risks that it faces in periods of economic difficulty.”
The PPF offers protection to some 12.4 million pensioners in the private sector defined benefit (DB) pension schemes should their employer become insolvent.
The NAO found that the fund currently manages its assets well and has not been exposed to severe losses in the recession. The fund’s investments, in aggregate, increased in value by 13.4%.
The value of the fund’s assets far outweighs its annual compensation payments: at the end of March 2009 its assets were £3.2 billion but its current compensation payments amount to £70 million a year.
Rash Bhabra, of employee benefits consultancy Towers Watson, has suggested that employers should be compensated if private pensions are not hit as badly as expected by the recession.
“Before it tries to amass a surplus, the PPF should say how unneeded funds would eventually be returned to employers if things do not turn out so badly. If levies include a premium to prepare for the worst, the PPF should view this as a ‘loan’ from employers which would not be repaid only if things go wrong, rather than a donation.”
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