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. Levy Investment Scheme assets PPF Members Employer recoveries
The first ten years in numbers PPF Balance Sheet 2005 to date 30000 25000 20000 15000 10000 5000 0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 5000 Assets ( m) Liabilities ( m) Surplus ( m)
Latest status 115% funding level 1.8 billion paid out in compensation 223k members, from ~700 schemes, transferred to PPF [Figures at 31/3/15] PPF SiA Total bn bn bn Net assets 22.6 4.9 27.6 Actuarial estimate of liabilities (17.8) (6.2) (24.0) Total net surplus/ (deficit) 4.8 (1.3) 3.6
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 management o to make sure we are always in a position to pay members the compensation they are entitled to
Evolving Risk Framework for the PPF 1 GOVERNANCE 2 TOOLS Committees Responsibilities Identify Measure Mitigate Monitor Report 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 3 Measure Monitor Report 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 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 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 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 +Future levy Current funding position +/-Investment returns -Benefit payments 2,000 economic scenarios PPF 7800 funding position Future claims Insolvencies of sponsors x 500 credit scenarios PPF s future funding position =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 A flight-path to 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 Measured as probability of success March 2015 88% probability that we would reach this target in 2030
Other Financial Risks Hedging Strategic Implementation Tactical Active Currency Alternative asset Concentration Credit spread Counterparty Liquidity Model Custody Transition Operational Purple=Risk owned by CIO Blue=Risk owned by another party The embedded risk framework directly impacts daily working life
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?