The Pension Protection Fund is a significant part of the public sector, but as of March 2018 it did not appear in either outturn public finances data or in our forecasts. This box from our March 2018 EFO explained why that was the case, and why recent announcements from the Office for National Statistics meant that it represented a significant classification risk to our forecast.
The Pension Protection Fund (PPF) was established in 2005 under the Pensions Act 2004 to pay compensation to members of eligible defined benefit pension schemes when the employer goes bust and there are insufficient assets in the scheme to cover PPF levels of compensation to its members. It imposes a levy on eligible schemes with the aim of having sufficient funds to pay compensation to members of schemes that have transferred to it.
At the end of March 2017, the PPF had net assets of £28.7 billion (of which £17.0 billion were government bonds) and actuarial pension liabilities of £22.0 billion, plus a further £0.7 billion provision relating to schemes under assessment for entry to the PPF.
The PPF has been classified to the public sector since its inception, but the Office for National Statistics (ONS) has never included it in outturn public finance statistics. We have not included it in our forecasts in the absence of guidance from the ONS on its treatment.
In January the ONS reconfirmed that the PPF is in the public sector, but changed its specific classification from an insurance corporation to a pension fund. Before including the PPF in the public finances statistics on this basis, the ONS plans to review the recording of public sector pension funds in general (including the PPF). It is currently considering options for the review, with the aim of consulting later this year. The scope of the review could be broad, covering the potential inclusion or exclusion of specific transactions, assets and liabilities of the pensions funds, as well as treatment of the Government’s net pension liabilities as an employer.
In the light of the continuing uncertainty, in this EFO we continue to forecast on the same basis as the current public finances statistics rather than attempting to anticipate the findings of the review. This means that our forecast includes all public sector pension schemes except the PPF.
Funded pension schemes therefore represent a risk, quite possibly a significant one, to our forecasts of both PSNB and PSND. However, in the absence of more information on the scope of the ONS review we cannot quantify this with any accuracy.
When the review is completed, the PPF is likely to present a continuing risk to the forecast as schemes enter liquidation and are absorbed by the fund. It is not known, for example, what effect the collapse of Carillion, whose defined benefit pension scheme had a large deficit, would have on PSNB or PSND if the PPF were included in these aggregates.
This box was originally published in Economic and fiscal outlook – March 2018