The board of the Pension Protection Fund has today published an updated ‘Statement of Investment Principles’.
The document sets out the board’s principles and policies governing the investment of the pension protection levy, and assets inherited from pension schemes that will transfer to the Pension Protection Fund.
The Pension Protection Fund was established by the Pensions Act 2004 to pay compensation to members of eligible defined benefit pension schemes when they become insolvent and unable to pay out to their members.
It is funded by a levy on all companies that are eligible for the fund, which pay a certain amount on based on the amount of risk their scheme poses.
The Pension Protection Fund said its investment strategy aimed to “balance security for scheme members and the interests of levy payers”.
Pension Protection Fund chief executive, Partha Dasgupta, said the investment strategy would enable the fund to pay compensation to pension scheme members who transfer into the Pension Protection Fund.
“This will provide security for pension scheme members while seeking to enhance value in the longer term for the levy payer by out-performing the liabilities and limiting downside risk,” he said.
“An additional objective of the investment strategy is to limit the board’s exposure to the risk of underperforming at the same time as UK defined benefit pension schemes. This will help ensure that the PPF is better funded during times of increased claims.”
The new document claims this will be achieved through investment in:
index-linked bonds; and
cash or derivative instruments relating to the above assets.
In addition, the strategy seeks to enhance the returns through investment in:
UK and global equities hedged back into sterling
global government bonds hedged back into sterling
The board will use derivatives to adjust assets to:
better match the fund’s liability profile
reduce the impact of unrewarded risks such as interest rate and inflation risk; and
provide some protection against fall in equities.