In this section

Our funding position

Our funding ratio as at 31 March 2021 is 127.3 per cent. This is an increase of 13.9 percentage points year on year. 

We have £38.0 billion in invested assets, an increase of £1.9 billion year on year. Our PPF reserves have increased from £5.1 billion to £9.0 billion. 

Our investment performance was very strong. We have more than made up for the drop in reserves we reported last year, which was a result of markets’ reactions to the emerging COVID-19 crisis in the last few weeks of 2019/20. 

Our reserves mean that we have £9.0 billion over and above what we estimate is needed to pay every current member and their dependents their full compensation for life. These reserves help protect us against future risks.

PPF reserves

Claims were relatively low, both in terms of number and value. We didn’t experience an increase in claims due to the COVID-19 crisis in the year, thanks to government support for businesses. 

There were 39 new claims in 2020/21, up from 38 the previous year, with a value of £271 million. 

The risk from new claims remains high: some insolvencies due to the COVID-19 crisis will be inevitable so we’re expecting claims to materialise over the coming year. Nevertheless, our low-risk, long-term funding strategy means we’re prepared to meet this risk and remain robust in the face of uncertainty.

Investment performance

We’ve had an exceptional year of investment performance. Across our growth (non-hedging) assets, which constitute around 60 per cent of the portfolio, we delivered a return of 17.6 per cent (£3.7 billion). 

Our current long-term investment strategy is designed to produce annual returns of just under three per cent, so the 2020/21 return represents around five years of ‘expected’ returns in a single year, continuing the pattern of strong long-term investment returns seen over the medium term.

Performance was broadly based, with the Equity, Private Equity, Absolute Return, Emerging Market Debt and Hybrid (UK buy and hold credit) asset classes making particularly significant contributions to the Fund. 

Alongside exceeding our absolute return targets, it was also pleasing to see our strong performance when viewed against external asset class benchmarks. This outperformance was delivered through dynamically managing our strategic asset allocation, alongside proactively increasing our funding to idiosyncratic managers and strategies in response to a fast-changing market. 

What we have not done is to alter the low-risk profile of the portfolio. We operate with a highly diversified set of assets and with a relatively low four per cent risk budget. The returns generated should be viewed very much in the context of this low-risk approach.


17.6% return on non-hedging assets


Our liability-driven investment (LDI) strategy, which represents the other 40 per cent of the portfolio, continues to protect the Fund from adverse changes in inflation and interest rates. 

This year marked a significant milestone, with the remaining parts of the LDI book being insourced. This final act represents the culmination of a five-year journey, which has seen the establishment of an industry-leading LDI team and delivered savings in the region of £60 million for our members. 

For the first time in seven years, UK bond yields rose during 2020/21, which had the effect of reducing the value of both our LDI (hedging) assets and the Fund’s liabilities. This means that the Fund’s overall return, at three per cent, represents both the strength of the returns on our non-hedging assets and the decline in value of our hedging assets, matching the movement in our liabilities. 

This combination of strong investment returns and lower liabilities means that our investment activities have made a significant positive contribution to the Fund’s funding position in 2020/21 as they have over the past three and five years.

Probability of success

Our probability of success (PoS) is the main way we measure our progress towards our funding target. We estimate this quarterly, using the Long Term Risk Model (LTRM).

The PoS started the year at 83 per cent. This reflected depressed markets at the bottom of the COVID-19- driven market fall, impacting both our own reported funding and a fall in the funding position of the schemes whose members we protect. It also reflected our view that the COVID-19 pandemic would be likely to increase the levels of claims on the Fund due to the worsening position of scheme sponsors.

Over the year, our own funding position and the funding of schemes have improved significantly. However, our central assumption is still for an elevated level of claims (see page 20). At 31 March 2021 the PoS was 95 per cent. This is clearly above our target of 90 per cent subject to macroeconomic conditions, and so gives a very good level of confidence in meeting our funding target.

In 95 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 significant uncertainty. This uncertainty remains unusually high, owing to the volatile market conditions affecting the financial strength of the schemes whose members we protect and the potential impact on scheme sponsors when government COVID-19 support packages are withdrawn.

Probability of success chart - March 2020 baseline 83%, Closer to horizon (1%), Scheme sponsors (4%), PPF funding 10%, Funding of eligible schemes 7%, Future expectations 0%, March 2021 baseline 95%

The chart shows the main drivers of the change in the PoS from last year end to this. We’ve seen large positive impacts from improvements to both our own funding position and that of schemes in the universe of schemes whose members we protect, including from the outcome of the Hughes appeal. However, with more detailed information now available about the impact of the COVID-19 pandemic on the economic health of sponsors and their ability to inject money into schemes, we estimate a negative impact driven by scheme sponsors. We are also one year closer to our chosen horizon than we were a year ago, and so there is one year less to recover from any adverse shocks. This has also led to a negative impact. On balance, our view of the future economy is broadly unchanged from last year, having minimal impact on the PoS.

Investing responsibly

Encouraging responsible practices is an important part of protecting our investments and better serving our members and levy payers.

Read more about our responsible investment strategy.

Responsible investment has always been at the core of how we do things and we have no doubt that the importance of being a responsible asset owner will only grow.

Barry Kenneth, Chief Investment Officer

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This latest direct investment supports our long-term strategy of investing in key UK infrastructure projects with strong ESG and sustainability credentials.

Funding boost to a key transport infrastructure asset

In 2020 we acquired a share in the UK’s largest single train fleet, Cross London Trains (XLT). XLT is part of Thameslink passenger rail franchise, which covers the most critical North-South London commuter rail corridor, making it a key transport infrastructure asset in London.

Thameslink is a £7 billion government-funded infrastructure upgrade programme to provide essential congestion relief to London and the South East. Thameslink rail franchise comprises the newest and most modern fleet of electric trains, Desiro City Class 700, manufactured by Siemens.

This new generation of electric trains is designed to increase passenger capacity, efficiency and operational reliability. They also help London in its bid to reduce carbon dioxide emissions and encourage rail travel over other means of transport.

Barry Kenneth

Chief Investment Officer

Enhancing our Long-Term Risk Model

Enhancing our Long-Term Risk Model

In 2020 we upgraded our LTRM software, which we use to estimate our PoS. Since then we’ve benefitted from the improvements this has made possible.

It has enabled us to undertake considerably more model runs than we were previously able to, producing a lot more information about the possible future state of our finances. It has also enabled us, in line with one of our 2020/21 business plan objectives, to make significant enhancements to the LTRM.

These enhancements were delivered some weeks later than planned, but now they are available they make our modelling more realistic in many important ways. They will provide us with very important information as we analyse our future funding strategy during 2021/22.

"Instead of taking seven hours on each of several machines, a run on the replatformed LTRM now takes just around 20 minutes on a single machine, which is a massive improvement.

"We can now model many more different risk and funding scenarios than before, freeing up people and time to investigate the underlying drivers and potential mitigating actions."

Italo Rocha Souza, Senior Actuary

Understanding and managing the risks we face

Understanding and managing the risks we face

Our risk management framework and risk strategy prepared us well for all the uncertainties we faced last year.

It meant we had the resilience to respond to the pandemic and continue operations uninterrupted and support our people, members and levy payers throughout.

In this section

Managing risk in a changing world

Our approach to the management of risk is embedded in our operations through our risk management framework. This covers our systems of governance, our risk appetite and our risk management processes. 

The processes we use to identify, measure, manage, monitor and report risks – including the use of our risk models, and stress and scenario testing – are designed to ensure risk-based decision-making and effective day-to-day risk management. When, despite this, things go wrong, our risk incident process makes sure that we learn from our mistakes. 

Our Risk and Audit Committee has overseen the continual development of our risk management framework to reflect our risk environment and emerging best practice. 

We have kept our enterprise risks, and their management actions, in constant view, given the quickly changing landscape and made sure that our risk appetite statements remain relevant. This has enabled the Committee to make sure that we’re taking appropriate action to manage the risks we have faced, especially in the light of the COVID-19 pandemic. 

In 2020/21 we ran a benchmarking exercise to align ourselves with the operational resilience standards of the Prudential Regulation Authority (PRA) and the FCA. Although we’re not regulated as an organisation, we aim to emulate the standards of regulated financial institutions. 

We also continue to benchmark against best practice in the field of risk management. This includes measuring ourselves against the UK Government’s Orange Book, ISO standards, and standards published by the Risk Coalition, a network of independent professional bodies. 

These benchmarking exercises have confirmed that our risk framework is appropriately designed, and have highlighted areas we need to develop further to make sure that we meet current best practice.



Responding to risk in a pandemic

We very quickly established a COVID-19 resilience tracker, with feeds from across the organisation. We met weekly at first, then eventually monthly as we monitored the situation.

We used our risk and control self-assessment process (RCSA) to monitor the most worrying risks and understand from where large risk exposures may occur. This included, for example, staff sickness and increased workloads.

“We were in a very good position because of all the hard work the IT teams had done to get us to the point where we could all work from home, including people in investment and the contact centre for whom that hadn’t previously been feasible because of the technology used in their roles. That was a key component of our resilience.”

Duncan Ward · Operational Resilience Manager

The outlook for our biggest risk

The risk of insolvency from the schemes we protect remains our biggest risk. 

Although we expected the pandemic to result in a number of insolvencies, and therefore claims on the PPF, government interventions have deferred, and possibly reduced, this risk. 

We’re monitoring the situation closely, and using our models to help us understand the number of insolvencies, and therefore claims, we might expect. This modelling has also informed our estimates of contingent liabilities. 

We continually monitor our risk radar to make sure we have a good understanding of new and emerging risks. For example, one of the risks on our radar is the changes to the pensions landscape that commercial consolidators may bring. 

Commercial consolidators, or superfunds, are an emerging development in the pensions industry. They aim to consolidate multiple DB pension schemes into one larger scheme. 

Should the consolidator market grow, it may change our risk profile from a fairly diverse portfolio of largely insolvency risk, to a much more concentrated portfolio of largely investment risk, with less diversification. 

The Pensions Regulator’s (TPR) interim authorisation programme will help regulate consolidators as they develop. We’ll continue to work with TPR on this and any future legislation as the market develops.

Court rulings

In September 2018 the Court of Justice of the European Union determined, in the Hampshire case, that every individual’s PPF compensation should be subject to a minimum of 50 per cent of the value of their accrued pension. 

In July 2021 the Court of Appeal ruled in the Hughes case that we are entitled to perform a one-off calculation approach for increasing payments to the 50 per cent minimum level. It also confirmed that the PPF compensation cap, as set in legislation, is unlawful based on age discrimination and has to be disapplied.

Although we now know that no party plans to appeal the ruling, we are working hard to plan how we will implement it. So for now, we’ll continue to pay members their current level of benefits.

Court of Justice of the European Union ruling – Bauer

We continue to work closely with DWP to agree our approach for implementing the Bauer judgment.


Fraud Compensation Fund

As we noted in last year’s Annual Report and Accounts, although historically claims on the FCF have been low, we had become aware of a high number of potential claims relating to schemes that were themselves part of a scam. It was unclear whether these schemes would be eligible to claim on the FCF, so we initiated a legal process to seek clarity on this, working with the trustees of one such scheme.
In November 2020 a court ruling clarified that occupational pension schemes set up as part of a scam were eligible to claim on the FCF. This is excellent news for the victims of these scams. 
We’ve received a number of claim applications from such schemes, with a total value of over £40 million. We expect to receive more claims from schemes following confirmation of eligibility to apply for compensation.            
Our 2019/20 Annual Report and Accounts confirmed the FCF had assets of £21.5 million, and if claims exceeded the current assets of the Fund, we’d need to seek additional funding.                

Given the value of the claims we had already received and our expectation that, following the court ruling, further claims will be made, we confirmed in April 2021 that we’re raising an FCF levy of 75p per member (30p for master trusts) in 2021/22. 

This FCF levy alone would not be sufficient to fund all potential claims, should they crystallise, so we’ve been working with the DWP to resolve the funding gap by securing a loan from the DWP to the FCF. 

The Bill to enable funds to be loaned to the FCF has had its second reading. This loan and its interest would be repaid using FCF levy receipts over time. 

We are confident that funding will be obtained and that we will be able to pay claims as they settle. However, until the resolution of all matters regarding the loan, including the completion of the required legislation, some uncertainty remains that we would be able to provide a continuation of service.



Investing responsibly

Encouraging responsible practices is an important part of protecting our investments and better serving our members and levy payers.

See more here

Strategic priority

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Built for innovation