The UK's Pension Protection Fund (PPF) has reported an increased surplus of £678 million at the end of the financial year to 31 March 2011, pleasing pension funds which rely on it to absorb them if their sponsor company goes to the wall.

The £248 million increase in the PPF's surplus now means that it is 5.1% over-funded, and is attributed in part to a heavily bond over-weight investment strategy. 70% of the PPF's £6.3 billion of assets are held in bonds, which are enjoying something of a boom in relation to sluggish equity markets. This includes substantial government bond holdings, albeit none from peripheral Eurozone states.

The results are especially important to the PPF at a time when it is working on plans to fund itself entirely by 2030 without enacting a levy on pension funds - historically an unpopular fee.

PPF Chairman Lady Barbara Judge told Pension Funds Insider that it is "very nice that the PPF has done extremely well in a period that has been difficult economically. Our levy payers can now feel even more secure along with the people to whom we make our pension payments".

Lady Judge heralded the defensive, diversified asset strategy at the fund for providing the impressive 4.7% returns.  She said "the key is diversification. We buy various instruments, alternatives and we've put in place a very sophisticated and successful hedging strategy to protect us from downside and upside risk."

She said that the strategy is holding up well despite the turbulence seen since the latest financial year began in April. She claimed that "while the average pension fund is down 10% since March, the PPF is only down 2-3% thanks to our diversified investment strategy that is conservative and not volatile."

Lady Judge stated that she is concerned about current macroeconomic risk: "Markets go down as well as up, I've known that for many years as I used to be a Securities and Exchange Commission treasurer. As a prudent investor who has responsibility for many millions of people, ultimately, we need to make sure we are conservatively and appropriately invested."

The PPF also revealed in its annual report that many of its key operational performance criteria have been met. For instance the fund collected 95.6% of uncollected levies, beating its target of 90%, whilst some 170 schemes completed the PPF assessment during the financial year surpassing a target of 135.

Lady Judge says "I'm really very proud of the fact that we have matched the very stretching targets to set ourselves to become a more efficient organisation".

The annual report is the first since the PPF revealed its new levy arrangement which promises to be fairer by rewarding pension funds who minimise their risk. As well as being the lowest ever combined levy at £550m in 2012/2013 It will also be linked to a fund's overall performance and strategy rather than focusing on their relative positions.

Darren Philp, Director of Policy at the National Association of Pension Funds (NAPF), welcomed the PPF's good figures on behalf of the industry, saying: "This is welcome news at a time when pensions are facing serious challenges, and it should instil some much-needed confidence among savers. People saving into final salary pensions in the private sector can feel reassured that their pensions are protected."

Philp continued to say that "the PPF faces an important challenge over the coming year with the introduction of a new formula for its levy on pension schemes. It is crucial that the new levy is proportionate, fair and that it remains stable."

First published 07.11.2011

dbillingham@wilmington.co.uk