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Our funding position

At 31 March 2023, our total consolidated reserves were £12.1 billion, an increase of £0.4 billion from last year. Our funding ratio has increased significantly to 156.0 per cent, an increase of 18.1 percentage points year-on-year.

Our funding ratio gives a measure of how our reserves compare to our reported liabilities. The strong growth in our funding ratio is mainly because our reported liabilities have fallen by around 25 per cent over the year.

The dramatic reduction in liabilities has been caused by the increase in interest rates observed over the first half of the financial year. To calculate our liabilities, we first estimate the cash flows we expect to pay in the future. In a higher interest rate environment, the amount of money we need to invest today to meet these cash flows, referred to as our liabilities, falls.


Our funding position

The increase in interest rates over the year has been unprecedented and we’ve also seen record levels of inflation. We recognise that the increase in the cost of living is worrying for our members.

Our approach to managing the risk of changing interest and inflation rates has always been to hold assets that behave in the same way as our liabilities when these rates change. This approach is commonly referred to as an LDI strategy or hedging strategy. This has meant that our assets under management have seen a sharp fall over the year, reducing from £39 billion to £33 billion as at 31 March 2023.

While around half of the assets we hold are used to fund our LDI strategy, the remaining assets are invested in a low-risk growth strategy with the aim of generating returns to grow our reserves. As well as being a volatile time for our hedging assets, it has been a challenging market for many of the other asset classes we hold too.

Despite this, growth assets have contributed a return of 1.9 per cent on our total assets under management over the year. This has increased our reserves by around £600 million and is above the return on the portfolio of assets we use to benchmark our performance relative to other similar funds.

We had relatively low claims on the PPF over the year. As well as the number of claims being low, the size of these claims has also been very small. The total value of PPF claims on the Fund was £14 million, similar to last year’s claims of £12 million.

Funding in the universe of schemes we protect

The changing economic outlook and higher interest rate environment has had a dramatic impact on the funding position of the schemes we protect.

Our PPF 7800 Index tracks the assets and liabilities of these schemes, with the liability assessment aiming to estimate the cost of securing PPF levels of compensation with an insurer.

Rising interest rates have resulted in a lower assessment of the total liabilities in our universe. While many of these schemes will also have hedging strategies to manage the risk from changing interest and inflation rates, they will not be exactly matched in the way that we are.

This means that in aggregate, our expectation is that the funding position in the universe will have materially improved. We estimate that the number of schemes now in deficit on this basis has reduced from around 34 per cent at 31 March 2022 to 15 per cent at 31 March 2023, with the combined deficit of those schemes in deficit falling from £60 billion to £6 billion.

For the first time in our history, our reported reserves now exceed the combined deficit of the schemes we protect. This represents a material change in the risk profile of the universe we protect.

Our funding strategy

In September 2022 we published our funding strategy review, which outlined that we are entering a maturing phase in our funding journey.

This new phase is characterised by lower claims on the Fund as a result of a reduced risk of underfunding in the universe we protect. We are entering the maturing phase from a position of significant financial strength.

Maintaining financial resilience

Our current level of reserves provides a high level of protection against the risk that we need to pay more in compensation than expected. We have therefore redefined our funding objective to ‘maintaining our financial resilience’. We define financial resilience as having reserves that are sufficient to provide a high level of protection against members living longer than expected and higher-than-expected claims.

Lowering levy

Based on our funding position at 31 March 2022, we concluded that our reserves were very close to the level needed to meet this test and as a result we began the process of transitioning to a lower levy. We reduced the amount we aim to collect from £395 million in the 2022/23 levy year to £200 million in the 2023/24 levy year.

By reducing the levy by almost half, almost all schemes will pay less levy. Industry experts told us our proposals are sensible and welcome at a time when there are many financial pressures on employers.

Financial resilience test

Our intention is to continue to grow our reserves above those needed to meet the financial resilience test in order to provide a higher level of protection to our members. This approach will also reduce the risk of funding being eroded in the future and the subsequent need to raise more funds through levy.

We expect any reserves in excess of those needed to meet the financial resilience test will predominantly be generated through a low-risk investment strategy. This year, our reserves have seen a small increase and the risks we face have reduced. This will act to increase the likelihood of us meeting our funding objective.


Final phase of our funding journey

The final phase of our funding journey will be our run-off phase, when our balance sheet will be reducing as we settle members’ benefits. Our modelling shows that our run-off phase is unlikely to happen before 2035.

We expect that during this phase, risks from claims will not be material, therefore our financial resilience will depend on us having sufficient reserves to provide a higher level of protection against members living longer than expected.

Based on our current approach to levy and investments, our modelling shows the likelihood of the PPF not having sufficient reserves to provide this level of protection in 2035 is less than five per cent. The Longevity Reserves and Claims Reserves are designed to cover all but the worst longevity and claim scenarios.

These reserves will be funded through both investment return and levy. Any additional reserves built up will be funded primarily through investment return.




Our response to higher interest rates

In the first half of the year, interest rates and inflation were increasing predictably. Through prudent rebalancing, we reduced our absolute exposure to higher risk assets, which built up our cash buffers.

When interest rates rose sharply at the end of September, our LDI programme performed as we expected given our robust risk and liquidity management framework.

When interest rates became materially higher, we allocated some of the additional cash buffer to sub five-year corporate bonds, which had become attractively priced. We remained under-risked for most of the year, holding additional cash buffers.

Key figures

   2023 2022
PPF reserves £12.1bn  £11.7bn
Funding ratio 156% 137.9%
Assets under management £32.5bn £39bn
Return of growth assets 1.9% 7.6%
PPF levy collected £386m £476m
PPF benefits paid £1.2bn £1.1bn
Actuarial liabilities £20.3bn £27.4bn


To me, the PPF means security. The PPF has provided me with the confidence that a comprehensive assessment of my pension plan is being undertaken and that members will be protected to a certain defined level.


Member of a scheme in PPF assessment, Bedfordshire

PPF Member on laptop with dog in background

Changes to levy rules

Despite the markets being challenging through the year, we’ve had strong investment performance. We ended the year with £33 billion in invested assets and our funding ratio grew significantly over the year. When interest rates rose dramatically in September, we were well prepared, and we didn’t have to sell any assets.

Having redefined our funding objective to maintaining our financial resilience, we’ve changed our investment framework so that we now have separate matching and growth portfolios.

Changes in our investment operations

Having completed our derivatives clearing project last year, we chose two brokers through a procurement process and worked with them through the year to be operationally ready to clear. We now clear our interest rate derivatives through the London Clearing House. We also completed our cash unitisation project.

The creation of internally managed unitised cash funds has simplified internal cash management by consolidating the cash holdings into one of two unitised funds. This has significantly improved the robustness of the operational processes in this area.

Restructuring our investment approach

Following the publication of our funding strategy review in September, and the shift in market dynamics, we completed a detailed review of our SAA. Our new funding framework separates the funding requirements for current members from those of future claims. In response to this, we’ve established a new investment framework that splits our investment portfolio into two to align with the separate funding requirements and to deliver the required returns.

  • Matching portfolio - The objective of this portfolio is to be a fully funded annuity portfolio for current members. This portfolio will use a limited amount of leverage to manage interest rate and inflation risk, but the leverage is expected to diminish over time. The matching portfolio contains Government Bonds, Derivatives, Cash and HAIL assets.
  • Growth portfolio - This will primarily be focused on protecting our claims reserves and conservatively building up additional reserves. A secondary objective is to fund the purchase of physical assets in the matching portfolio. The growth portfolio contains Public Equity, Emerging Market Debt, Investment Grade Corporate Bonds, Absolute Return, Private Equity, Real Estate, Alternative Credit, Infrastructure, and Timberland & Farmland.

We will continue to use a well-managed, conservative LDI strategy to ensure that the interest rate and inflation risks within our liabilities are fully hedged.

Adjustments to the Strategic Asset Allocation

Overall, the risk profile of the aggregate investment portfolio remains consistent to that being run previously. However, we seek to add long-term value by optimising the strategic risk budget allocation within the investment portfolio.

Although the growth and matching portfolios start with similar asset values, the allocation of the strategic risk budget between the two is differentiated to align with the objectives of each portfolio. Most of the strategic risk budget has been allocated to the growth portfolio, with a much smaller amount of risk being allocated to the matching portfolio.

Changes to the SAA have also been driven by an additional risk consideration which is consistent with the funding strategy, and which focuses on minimising the risk of eroding the reserves over the medium term.

The main changes to the SAA are:

  • An increase in Short-Dated Corporate Bonds, HAIL, Private Equity and Infrastructure
  • A decrease in Public Equity, Emerging Market Debt and Absolute Return, Government Bonds

How our Liability Driven Investment (LDI) strategy has performed

The liability side of the PPF balance sheet reflects the value of payments we expect to make in the future to current scheme members. Changes to interest rates and inflation affect the valuation of those future payments.

Our LDI strategy helps us to control the impact of these changes on our reserves through investing in assets that will behave in the same way as our liabilities: things like UK Government bonds (known as gilts) that go up and down in value as interest rates change.

Bank of England building

Greening Government Commitments

Five-year performance

The investment portfolio has again outperformed our five-year rolling target. Over the last five years, the total Fund has delivered an annualised contribution of 3.09 per cent versus an annualised target of 2.37 per cent. Non-LDI assets alone delivered an annualised contribution of 4.61 per cent.

Over the same period, the investment team contributed 96bps over and above the return of the Strategic Asset Allocation (SAA) benchmark. The main contributors to total outperformance versus benchmark were Private Equity, Infrastructure, and Timberland & Farmland.

Investing in sustainable property

This year we invested in a loan to finance the construction of a state-of-the-art office building in the business district of Bristol. The seven-storey property is expected to have a net internal area of 200,000 sq ft and the capacity to host more than 2,000 employees.

Case Study
Sustainable building with all glass windows against blue sky background

Leading the restructure of a forestry asset

Leveraging existing positions and manager relationships to optimise future investment exposure is a key part of our portfolio management process. This year, we ensured that a restructuring of one of our existing hardwood forestry assets met with our investment and ESG requirements.

Case Study
Forestry and landscape

Recognition for our investment team

We were incredibly proud to be named Best UK Pension Fund as a joint winner at the IPE Awards in December 2022. Also in December 2022, our Chief Investment Officer (CIO) Barry Kenneth won the CIO Asset Owner Industry Innovation Award for Efforts in ESG. The awards recognise asset owners driving change and enhancing institutional fund performance.

These wins recognise our efforts to be a leading responsible investor and the progress we have made over the past year in the following areas:

  1. improving our access to insightful ESG-related data (especially in private markets)
  2. the continued adoption and evolution of ESG practices by our external managers across all markets
  3. supporting several ESG-themed opportunities, including a fund specialising in resilience infrastructure, social housing investment, and seeding an afforestation fund that plants new areas of woodland
Claire Curtin
Head of ESG and Sustainability
Claire Curtin, Head of ESG
We’re delighted to have won a prestigious IPE award that recognises our extensive efforts to put ESG at the centre of our investment strategy.

Printed copy of ARA on wood surface

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