‘The PPF’s Approach to Risk Management’

Hans den Boer – Chief Risk Officer

SPP London Evening Meeting 14 October 2015

We’ve come a long way in ten years

• PPF established by Pensions Act 2004

• Opened our doors in April 2005

• Took responsibility for the Financial Assistance Scheme in 2009

A reminder….

PPF

Employer recoveries

Investment

Scheme assets

Levy

Members

The first ten years in numbers

‐5000

0

5000

10000

15000

20000

25000

30000

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

PPF Balance Sheet ‐ 2005 to date

Assets (£m) Liabilities (£m) Surplus (£m)

Latest status

PPF SiA Total£bn £bn £bn

Net assets 22.6 4.9 27.6Actuarial estimate of liabilities

(17.8) (6.2) (24.0)

Total net surplus/ (deficit)

4.8 (1.3) 3.6

• 115% funding level

• £1.8 billion paid out in compensation

• 223k members, from ~700schemes, transferred to PPF

[Figures at 31/3/15]

Our Objectives:

• Deliver excellent customer service to our members, levy payers and other stakeholders. o Over the past year we have made progress on the major project aimed at bringing our PPF

member services operations in-house. This initiative will ensure the PPF has the control and flexibility to deliver exceptional service as part of its ambition to be a high performing Customer Focused Financial Institution

o The new PPF-specific model (announced last year), developed with Experian following consultation with levy payers and the industry, allows us to offer levy payers greater transparency and certainty

• Meet our funding target through prudent and effective management of our balance sheets

• Pursue our mission within a high caliber framework of risk managemento to make sure we are always in a position to pay members the compensation they are entitled

to

Evolving Risk Framework for the PPF

USE TEST

• Demonstrates practical and ongoing utilisation of the Risk Management Framework• Tactical and strategic decision making informed by the output from RCSAs, Risk & Loss Events, Key Risk Scenarios and KRIs

• The output from all of these “Tools” must be clearly evident in our assessment of our risks and our probability of success

• Risk assessments of New Business Initiatives driven by the Risk Taxonomy

• Complete and accurate Risk Taxonomy• Comprehensive programme of risk and control self assessments (RCSAs) (Embedded in the business governance)

• Thematic risk reviews (By Risk Team)• Key Risk Indicators with trend analysis• Effective process for collecting Incidents & Loss Events • Use of Key Risk Scenarios to identify and quantify potential risk and loss events• Data collected from all of the above must feed into the management of our reputation and Probability of Success

• Risk Reporting to support effective decision making

Measure Monitor Report

TOOLS

• Transparency & consistency around properly informed decision making

• Robust Risk Culture• Appropriate Committee Structure• Comprehensive Policy framework• Clearly articulated Risk Appetite at a PPF and linked to the Taxonomy

• Effective Training

GOVERNANCE

ResponsibilitiesCommittees Identify Mitigate Monitor Report

3

To extract maximum value we must be able to evidence that all three elements are linked, owned and demonstrably employed by the business risk owners

Measure

21

6

PPF Risk Governance

Risk Management Function

• The PPF manages two main areas of risk; operational risk, from member services to the levy collection, and financial risk, executing the Strategic Plan to manage the risks associated with investments

• Our Risk function consists of 5 small teams: Portfolio & Stress Testing, Market Risk, Credit Risk, Operational Risk and Actuarial Risk & Modelling.

• One key aspect of the ways we manage financial risk is our risk modelling, using our long-term risk model (LTRM) to inform our Funding Strategy, with the aim of securing self-sufficiency

Claims Risk: central to our role as safety net

• The PPF provides protection to members of 6057 DB schemes. Many of these schemes are in deficit.

• Monthly, we publish our estimate of the combined deficit through the PPF 7800 index.

• Large insolvencies have the potential to wipe out the PPF surplus

• Our estimate is that 36 funds have a deficit greater than £1b, and 90 greater than £500m

• Through our ‘Top500’ model we focus on the credit quality of the 500 largest funds in deficit combination of publicly available ratings and our own Experian model

One Key Risk: A worrying trend

• The TPR shares certain DB scheme data with the PPF

• This shows that the length of the DB schemes’ recovery plans is not improving

• While sponsor contributions are being made, the funding gap is overall not being closed

• Mainly caused by low interest rates

Risk modelling: LTRM

PPF’s future funding position

Future claims

PPF 7800 funding position Insolvencies of sponsors

Current funding position

+Future levy +/-Investment returns -Benefit payments

2,000 economic

scenarios…

x…500 credit scenarios…

=1,000,000 total scenarios

Risk modelling: LTRM

• LTRM modelling a key part of our funding decisions, to achieve our funding target to be ‘self-sufficient’ by 2030

• While ‘median’ scenarios look positive, a key risk is that large claims will occur in the future.

Funding Self Sufficiency

• Zero market risk• Zero interest rate and inflation

exposure• Reserve (10% of liabilities) to

hedge future claims and longevity risk

• Levy only for expected claims

A flight-path to self-sufficiency:

Measured as ‘probability of success’ – March 2015 88%probability that we would reach this target in 2030

The embedded risk framework directly impacts daily working life

Hedging Strategic Implementation

Tactical Active Currency

Alternative asset Concentration

Liquidity

Credit spread

Counterparty

OperationalTransition

Model

Custody

Purple=Risk owned by CIO Blue=Risk owned by another party

Other Financial Risks

Operational Risks

• Information Security Key area of focus due to insourcing of member services administration. • Training • ‘Penetration Testing’, • Stress scenarios. • Preventative & Detective measures• Crisis response preparedness

• Business Continuity Planning What to do in case of major disruption• Disaster recovery site• Training and regular testing that BCP process works as designed• Major Incident Team• ‘What-If’ scenario planning

Any Questions?