The collapse of several long-established employers with large defined benefit (DB) schemes could vastly overtake calculations for a £20bn hit to the Pension Protection Fund (PPF), warns Lane Clark & Peacock (LCP).
The consultancy's latest analysis on the impact of the coronavirus pandemic on the lifeboat fund - released on Thursday (27 August) - examines £10bn and £20bn scenarios for potential hits to the PPF.
LCP said the PPF is likely to face a ‘multi-billion pound hit' as a direct result of insolvencies in the wake of the Covid-19 crisis, but adds that the flexibilities built into its funding structure should be "enough to withstand all but the deepest crisis".
Extreme measures, such as cutting PPF benefits across the board, would only be necessary if several of the nation's most-established employers with large DB schemes were to become insolvent.
LCP analysed 12 years of claims on the PPF starting with the Global Financial Crisis (GFC), finding that there was an average of over 100 new claims on the PPF each year, with an aggregate impact on the PPF's deficit of £3.7bn.
While there was a low claims average of around 50 per year for the PPF from 2013/14 to 2018/19, LCP found the total hit was higher than in other years, reaching around £4.5bn. This was primarily due to the impact of the Kodak Pension Plan No. 2 accounting for around one third of the total; this demonstrates that it is the extent to which insolvencies are concentrated among firms with larger deficits, LCP said, rather than the total number of insolvencies.
LCP's two model scenarios for the immediate years after Covid-19 considered a £10bn hit on the PPF and a £20bn hit. The £10bn scenario assumes a similar rate of insolvencies as followed the GFC but based on more recent claim levels. The £20bn scenario considered a slower recovery where PPF claims are focused on companies with larger deficits.
Around a quarter of the FTSE 350 comprises firms in the most at risk sector due to coronavirus including hospitality, entertainment, aerospace, manufacturing, and high street retail.
With many also sectors with long-established employers with large DB schemes, LCP noted that if several were to face insolvency, the £20bn scenario could be an underestimation and a challenge to the PPF's capacity.
LCP said several levers it could be put in place by the lifeboat fund to absorb "even a relatively large series of additional liabilities." These include putting back the 2030 date at which PPF is targeting self-sufficiency and accepting a lower target probability of achieving it.
Speaking to PA's sister title Professional Pensions (PP) in June, PPF chief financial officer Lisa McCrory confirmed the PPF is currently 100% funded, despite earlier PPF reports that its probability of being self-sufficient by 2030 had dropped by two percentage points between 2017/18 and 2018/19.
McCrory told PP that the lifeboat fund was well-equipped for a potential onslaught in the wake of the pandemic, however.
Raising levies - currently the PPF raises around £600m from DB schemes - and changing investments through taking on higher risk could help boost sustainability, LCP said.
LCP partner Jonathan Wolff added: "The PPF has provided valuable peace of mind for DB pension scheme members for more than fifteen years, and it is reassuring to see that this ‘lifeboat' is relatively well placed to navigate the current choppy waters.
"The PPF has a range of levers it can pull to absorb increased cost pressures without having to resort to cutting benefits to members. But we cannot be complacent. Recent history has been a reminder that the crucial question is whether the insolvencies which we are likely to see in the coming years will hit firms which also have large DB deficits.
"There remains a risk that too many such insolvencies could put a serious strain on the system".
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