Pension Funds Insider caught up with Pension Protection Fund (PPF) chief executive Alan Rubenstein to reflect on two years in the top job at the fund of last resort which have seen significant changes, especially inlevy charging arrangements

Are you happy with how your two years at the PPF have gone?

We never want to be complacent, but I am very pleased with how the PPF has developed over the last couple of years.

We've delivered a levy framework which is much more predictable and stable for levy payers - and that is as important to people as fairness. What we're trying to do is develop a levy that charges everybody according to the individual risk they pose to the PPF, what we call the 'bottom-up' approach.

One of the great irritations schemes had is that they thought they were doing the right thing for pension scheme funding, for example, by de-risking. They then found that because others had done more, their levy went up, instead going down as they expected. The new levy will depend on what you do and not what everybody else does.

We've also been doing work on our funding strategy. We've addressed questions such as what happens if the PPF ends up with a huge surplus and no schemes left? And, what happens when the number of schemes shrinks and the PPF does not have enough money to fund itself? Does that mean that the remaining pension schemes are going to bear a disproportionate burden?

So we've set out our framework for becoming financially self-sufficient in 20 years' time. By that stage, most schemes will either be very well-funded and never likely to be a drain on the PPF. Or, they will have been potentially closed to new entrants, bought out, or have transferred to the PPF.

However, there's still bound to be a scheme population - although they will pose a much lower risk, particularly when you think that, by 2030, we've calculated that the PPF could be about £80bn in size.

This means that the levy will become progressively a less important part of the jigsaw. We also plan to reach a point where we will effectively hedge out all the risks and retain a margin for those we couldn't hedge. This has been a milestone for us in terms of explaining to people how we are planning for the future.

With the PPF assessment process, we've carried out our Assess & Pay pilot programme. This has been a great success and all 50 schemes identified in the pilot have progressed through assessment within 12 months – which is what we wanted to achieve.

We also learnt a lot of lessons which enabled us to improve the Assess & Pay process. These improvements mean that we can now roll this pilot out to the wider portfolio. One of the major lessons was to make sure that most s143 valuations (used to determine the level of a scheme's funding in accordance with s143 of the Pensions Act 2004) will be carried out by a panel of selected specialist actuarial firms. This makes the process much faster and efficient.

We've also been lucky with the economic background. We've gone from a deficit of £1.2bn in March 2009 to a surplus of £400m in March 2010. So, it's not too difficult to work out that we're likely to be in a similar kind of place this year. It's undoubtedly been an exciting couple of years.

The new levy framework seems to have been well received. There has however, been some criticism, particularly over trustees not being able to correct data that may be entered incorrectly from the Regulator's exchange system and possible 'cliff edges' for schemes moving from one insolvency risk band to another. What's your response to those charges?

There are two distinct questions here.

With data, there are two things to say. The first is that we use the data to set the levy scaling factor so it's a bit odd for people to come back afterwards and have them say 'only kidding, here's my real data'. There is an obligation, by law, that people have to give us timely and accurate information. If we were to permit wholesale changes to data then it would be very difficult for us to predict how much levy we are going to collect.

Secondly, it would send out the wrong message about the need to provide accurate information. We want to reinforce the message that timely and accurate completion of information on exchange is an important trustee responsibility.

However, there is a myth that has developed that we will never change the data. By and large, you have to have a good reason as to why you didn't send in accurate data in the first place. But the board does have discretion to make changes and on occasion does so.

Turning to cliff-edges, we started off thinking in bands as the rating agencies do. After consultation, we decided on having 10 bands. This means that we've reached a point where the maximum jump from one band to another is something like 60 per cent. This is actually less than the maximum shift within the old regime.

Not having a score that moves every year will bring stability - something that everyone wanted. And, we're convinced that the ten band system will produce a much more stable environment with many people seeing either no change, or only a fall or rise of up to 10 per cent.

Why have you chosen three years as the period during which no changes will be made to the framework? Why not longer?

Firstly, a three-year term fits in with part of the natural cycle in scheme valuation. Secondly, it fits in with what we're trying to do in the long-term.

Our priority is to have the right amount of money to meet our liabilities, but we don't want to have a huge surplus. The longer we keep the levy constant, the more we risk having to make sharp changes in the levy which could affect our long-term funding target.

Do you hope to finally put to bed the issue of the levy being 'unfair' with the new proposals?

We think the new formula offers a significant improvement on what we've got. As I say, how levy payers see the levy is rather conditioned by how it affects them. So, I don't think we'll ever have mass demonstrations outside our offices from levy payers thanking us for our new levy formula.

But what I do believe is that we have worked, and will continue to work, hard with the industry to come up with something that is stable, predictable and practical. And the response we've had suggests that, broadly speaking, we've met that challenge.

Do you think the PPF's investment model, particularly with its focus on ESG and use of the repo markets, for example, should serve as a model for other pension schemes in the UK? In particular perhaps closed DB schemes?

We wouldn't necessarily hold ourselves up as a model for other schemes. We're very different as we are the pension fund of the last resort for the UK. This means that if, for example, we were to bet heavily on UK equities or corporate bonds, we would be taking the bet twice.

That's because the circumstances that would cause those assets to perform poorly are precisely the circumstances that would lead to companies becoming insolvent and pension funds ending up in the PPF. We're always going to have a more defensive strategy because we want to be at the lower end of the risk spectrum.

What is useful for all schemes to understand is that we take our liability-orientated strategy very seriously to the extent that we do use swaps and repos to hedge out interest rate and inflation risk as much as we can. I think that for schemes generally, understanding their liability profile is certainly a good exercise but we're not in the business of telling schemes how to invest.

This is also true for the investment risk element we have introduced into the new levy framework. As I say, we are not in the business of telling schemes how and what they should invest in. But what we're saying is that if you've agreed a strategy as trustees, with your sponsor, which you and they are happy with then that's fine. But you have to accept that, if it is a volatile or equity-heavy strategy, you will suffer more stress in difficult times than someone who has a matched strategy.

What matters to us is firstly, the probability of insolvency, and secondly, the loss we would suffer given that insolvency. I think most people have accepted the principle of that readily.

How much of a problem is data for the PPF when looking at schemes in the assessment period?

I saw some figures recently for schemes that don't pass even the most basic tests for primary data, and it's frankly concerning. They showed that just under 20% of schemes had actually done a check of all the fundamental common data. And of those who had, about half of them appeared to be missing more than one item of this data.

Now, when you need to nail down every last piece of data as part of the assessment process, then it's not surprising that lack of data slows the process down. So I suppose it is one of our crusades, along with the Pensions Regulator, to get the industry to improve data quality and we're working both with the Regulator and schemes to do that.

The worst time to worry about the quality of the data is when the company has gone bust. The right time to look at it is when the company and the scheme are running well. Data is the biggest single hold up that any scheme will face.

What does the future hold for you and the PPF?

Our short-term priorities are to get the implementation of the new levy framework right. Secondly we are looking to build on the work we've been doing with the Assess & Pay programme in getting schemes through the assessment period more quickly.

At the very start of the PPF's life, we set ourselves a target of getting three quarters of schemes through the assessment period in two years and we've never achieved that, largely because of these data problems and some legal issues. But we're determined to achieve this target.

We've brought the periods down progressively so now we're sitting at an average of about 30 months. We'd like to get to 75 per cent of schemes through in two years. To get there we are dependent on schemes making sure their data quality is precise, accurate and up-to-date.

Our longer term legacy is to deliver a soundly-funded PPF that has a clear strategy to make sure that it can pay the right amount to the right people at the right time which remains our mission. As long as we can do that, then I'll be happy.

First published 27.06.2011

mhandzel@wilmington.co.uk