Funding position

As at 31 March 2022, we have £39 billion in invested assets, an increase of £1 billion year-on-year. Our total consolidated reserves are £11.7 billion, an increase of £2.7 billion from last year.

Our funding ratio is now 137.9 per cent, this is an increase of 10.6 percentage points year-on year.

Thanks to another year of strong investment performance, coupled with low claims, the Fund is more buoyant than it has ever been. Our reserves mean we currently have £11.7 billion above what we estimate we need to pay every current member and their dependents their compensation for life.

At the same time, we have seen overall improvements in the funding of the schemes we protect. This, along with government support for business, may explain why we didn’t receive as many claims as we expected during and following the pandemic. There were a total of 17 new claims in 2021/22 down from 39 the previous year with a value of £12.1 million.

In this section

Progress towards our funding objective

The improvement in both our own funding and that of the schemes we protect increases the likelihood of us meeting our current funding objective of being self-sufficient by our funding horizon, which we currently define as being 110 per cent funded at 2030.

Our Probability of Success (PoS) is the main way we measure progress towards this target. As at 31 March 2022 our PoS was 96 per cent, increasing from 95 per cent over the year. This means that in 96 per cent of the scenarios modelled we have a margin of at least 10 per cent at the funding horizon. Like any complex modelling exercise, our projections are subject to some uncertainty.

The chart shows the main drivers of the change in our PoS over the year. The increases arising due to improvements in our own funding position and to that of schemes in the universe of schemes we protect have been offset by changes we made to the long-term risk model (LTRM) and the assumptions used.

Upgrading the LTRM was a planned activity over the first two years of the strategic plan and has enabled us to improve the modelling of the risks we face. We have also enhanced some of our modelling assumptions too, this combined with a more pessimistic economic outlook are the main reasons for change here.


Evolving our funding strategy

Our ultimate funding goal is to have enough money to enable us to pay all our members, both current and future, their compensation when it falls due. Our selfsufficiency objective, which we published in 2010, has guided our approach to investment and setting levies and ultimately helped us build our financial strength and grow our reserves.

As demonstrated by this year’s results, we now stand in a strong financial position, with exceptional investment performance in recent years having accelerated progress on our funding journey.

In our 2019-22 Strategic Plan we committed to reviewing our Funding Strategy at the end of that three-year period. Over the past year and more, we have been considering afresh the risks we face and how our approach needs to evolve in the future.

We still face risks, notably from underfunding within the population of schemes we protect and future insolvencies triggering claims on the PPF. However, we believe these risks have reduced over time, and our healthy reserves now provide us with a good level of protection.

We are now in the final stages of the review and will be in a position to share the outcome following completion of our stakeholder engagement programme. Assuming our funding position remains robust over the next three-year period, our expectation remains that we will look to reduce how much levy we collect in keeping with our long-stated intention.

As usual, we will formally consult on our proposals for levy in the autumn of 2022.

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£1bn invested in forestry

Our investment in soft and hardwood forestry hit a milestone of £1 billion this year, with key sustainable forestry assets across Australia, New Zealand, the USA, UK, Ireland, the Baltics and the Nordics.

We invest approximately 30 per cent of our forestry allocation directly, recently investing in the New Zealand plantation Wenita, the largest timber producer in Otago with 30,000 hectares of sustainably managed forests.

Forestry is a key element of our responsible investment strategy as it can help mitigate CO2 emissions by storing carbon. It’s one of the few viable nature-based investment solutions in the journey towards a net-zero carbon world.

Well-managed forests can also increase biodiversity and are more resilient to climate change.

In this section

Five-year investment performance

The investment portfolio has performed strongly against our rolling five-year target. Over the last five years, the total Fund has delivered an annualised contribution of Cash + 2.73 per cent versus an annualised target of Cash + 1.50 per cent. Non-LDI assets alone delivered an annualised contribution of Cash + 4.76 per cent.

Over the same period, the investment team contributed on average £270 million
per annum (around 90bps per year), over and above the return of the Strategic
Asset Allocation (SAA) benchmark. The main contributors to total alpha over that period were outperformance in the Public Equity, Private Equity, Timberland and Farmland and Infrastructure portfolios and also the asset allocation positioning relative to the SAA.

One-year investment performance

In the last year the portfolio contributed Cash + 4.28 per cent, with every non-LDI asset class delivering positive returns. The investment team added £610 million (150bps) of outperformance over the SAA benchmark over the same period. The main contributors to alpha were outperformance in the Private Equity, Infrastructure, Alternative Credit and Real Estate portfolios. Asset allocation positioning also contributed strongly, as we actively managed the asset allocation through the year while maintaining an overweight position to private markets relative to public assets.

How our investment approach has evolved

Following a successful insourcing programme and systems upgrade, most of our investments are now managed in-house, giving us greater control over our assets.

Over the years we’ve evolved our investment approach by hiring experienced investment professionals with excellent track records, improving knowledge and experience within the team, and we’ve improved the diversity represented within the function.

We now have the right balance between internally and externally managed investments. Externally, all of our managers are given tangible mandates to perform against. Importantly, all investment activities are fully supported by an investment operations team and integrated risk management within the investment function.

During the last Strategic Plan period we finalised the insourcing programme. More recently, we implemented a new performance measurement and attribution system, which allows us to monitor and analyse both our internal and external manager positions in real time. We are now able to analyse and understand our investment performance at a very granular level. By using this detailed portfolio information in our decisionmaking, we are able to improve investment outcomes.

We’ve continued to develop and embed a market-leading approach to responsible investment, which has significantly advanced our strategic response to climate change. We are actively engaging with our external managers to better align their investment strategies with our ESG objectives and to improve the quality and depth of their ESG reporting. There will be many other developments and challenges in this area over the next Strategic Plan period, including exploring more opportunities for sustainable investment in asset classes such and forestry and infrastructure as well as understanding our own environmental impact outside the investment portfolio.

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For some people, having no protection for their pension would be an absolute disaster.

“I’d never heard of the PPF until I received a letter to tell me that my former employer had gone into liquidation and that my pension would be picked up by the PPF. It was a big relief to know that my pension wasn’t lost. I was still in touch with a colleague who’d worked there for more than 20 years – he was really worried about his pension so it was a big relief.

“I’ve had a play on the website to find out how much my PPF payments will be and when I can take them. It’s quite amazing. It’s a really useful tool, really easy to navigate and use.

“I’ll probably retire online when I start my payments because it’s the easiest way.

“I’ve had to contact the PPF a few times. Every time I’ve spoken to somebody, they have been absolutely amazing. I’m impressed with the quality of support and the way the team handle calls. They’re so helpful and make it really, really easy.”



What makes our investment strategy innovative?

We were incredibly proud to receive three awards at the pension industry’s respected IPE Awards in December 2021, including the coveted title of European Pension Fund of the Year 2021. We received this award in recognition of our innovative investment strategy.

We have a unique set of skills within the team. We use this combination of expertise and knowledge to handle our investments differently from other funds.

In this section

Investment framework

The Board sets a risk budget for the Investment team which drives the process for determining our Strategic Asset Allocation. Our objective is to allocate this risk budget to assets in our investment universe as efficiently as possible, while ensuring that the interest rate and inflation risks within our liabilities, are fully hedged, through our LDI strategy. The non-LDI (growth) part of our portfolio is a diversified portfolio of public and private assets with allocations that are optimised against the risk budget.

A market-leading LDI strategy

Our long-term liabilities are complex in nature - for example, linked to CPI inflation with caps and floors - and there is a lack of financial assets that can be purchased to perfectly hedge the risks in our liabilities. We manage our hedge portfolio daily, to ensure that we’re fully hedged against the financial impact of market changes in inflation and interest.

In this way, our hedge portfolio remains efficient and effective at all times. In terms of instruments, the hedge portfolio makes use of both cash (physical), bonds (government bonds and hybrid assets) and derivatives. Our LDI strategy is also unique in that our liabilities are reestimated on a weekly basis.

This is a process that would normally be carried out only annually or quarterly by most pension funds. As we manage this portfolio in-house, we can react to any changes in our asset or liability profile in real time to ensure we are always fully hedged.

Strategic Asset Allocation

We have a very diversified portfolio of `growth’ assets which are expected to deliver returns in excess of the risk-free rate. We also take advantage of the long-term nature of the Fund by accessing illiquidity premiums through our private markets portfolio. We take a considered approach when implementing exposures
to asset classes, some of which are non-traditional, to ensure that we optimise the use of the risk budget.

• Hybrid assets These are investments in long-dated investment-grade cashflows - largely corporate bonds. This strategy is similar to an annuity portfolio of an insurer, and is designed to optimise allocations to both credit and illiquidity risk, while also providing a cheaper source of duration to the LDI strategy.

• Absolute Return This is structured to be a marketneutral and risk-controlled strategy.

• Public equities Rather than being a traditional market-cap weighted portfolio, we have chosen to invest in a low-volatility, low-carbon equity strategy.

• Infrastructure This global strategy has a bias towards core/availability investments, rather than being predominately GDP-linked.

Risk framework

We have a robust risk framework which means that our asset allocation and risk levels are monitored in real time. This allows us to adjust our exposures as necessary to ensure that risks are maintained within the strategic risk budget at all times.

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Largest UK regional property deal of 2021

When we sold one of our key property assets in late 2021 – One Hardman Boulevard in Manchester – it ended up being the year’s largest property deal in the UK outside of London, with a purchase price of £292 million.

NatWest Group purchased the office complex, which is in Manchester’s central business district. With the lease running down, together with the favourable valuation, we believed the time was right to sell, and secured a strong return on investment for the Fund.

Managing the risks we face

Managing and understanding our opportunities, challenges and risks is critical to protecting our members and achieving our objectives. Over the course of the last Strategic Plan, we have focused on bringing consistency across our risk management framework (RMF).

The framework allows us to compare and manage risks more effectively and helps us see the organisation as it is - an interconnected system of finance, processes and people. The framework is robust and the organisation strong and risk-aware. Our focus is on continuing to embed further improvements in consistency, reporting and evidencing that controls are working as intended.

A key part of this framework is our risk appetite statements, which communicate the Board’s attitude to risk, so we know the level of value, resource or money we want to put at risk in order to meet our objectives. The risk appetite statements make sure senior managers understand the amount of risk they can actively take or need to mitigate.

Using these we have assessed our return to the office in a controlled and proportionate way, gradually increasing to full implementation of our pilot for hybrid working by the end of the Strategic Plan period.

Our RMF has supported our approach to managing significant events, such as the implementation of key judgments during the life of the Strategic Plan (Hampshire, Hughes and Bauer). It has also facilitated our digitalisation work and, with the Information Security team, supported the important work we do in managing cyber security risk.

We have also considered other emerging challenges and opportunities against the background of our RMF: new scheme funding obligations and regulations, the rise of consolidators and ever-prominent ESG issues.

In this section

The three lines of defence against risk

1st Line of Defence 
All Business areasResponsible for the identification and management of risk within risk appetite
2nd Line of Defence 
Risk, Compliance & Ethics 
For certain activities other functions including Actuarial Financial Management Information Security
Provides advice, support, oversight, challenge and assurance in respect of governance, risk and internal control
3rd Line of Defence 
Internal Audit
External Audit
Provides independent assurance in respect of governance, risk and internal control


Understanding our biggest risk

The funding of the schemes we protect and their sponsors’ risk of insolvency remain the biggest risk we face. While the risk exposure is not within our control, understanding it allows us to plan and prepare for its impact on us.

Although we expected the pandemic to result in a number of insolvencies, this hasn’t yet come to pass. The uncertainty around if and when claims will materialise, linked to whether or not government support for business would be extended, has been challenging.

However, we stand ready to absorb such claims. We continually monitor the risk created by market volatility, and model the number and size of claims we might expect.

We compile and analyse data on the schemes we protect and publish this information annually in The Purple Book, a key product of our RMF. The data gives us an in-depth understanding of how the universe of schemes we protect is changing.

Understanding these trends helps us paint a realistic picture of how this landscape might look in the future and helps us to model the level of claims we may need to absorb in years to come. This, when combined with information relating to our membership, helps inform decisions on our future levy and investment strategy.

Evolving our Long Term Risk Model (LTRM)

Over the past year, we’ve carried out further work to leverage the benefits of our upgraded LTRM software and make our risk modelling more realistic. The new platform has allowed us to conduct additional model runs, alongside a comprehensive review of our risk assumptions. This work has in turn fed into our funding strategy review.

In line with one of our 2021/22 Business Plan objectives, we’re continuing to enhance the LTRM and have retendered for our Economic Scenario Modeller, which will feed into this. We’re now in the process of implementing this model, which will be a key focus for the start of the next financial year.

Strategic priority

Built for innovation

Built for innovation